SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934
Filed by the Registrant / x /
Filed by a Party other than the Registrant /__ /
Check the appropriate box:
/ __ / Preliminary Proxy Statement / / Confidential, for
/ X / Definitive Proxy Statement use of the
/__ / Definitive Additional Materials Commission Only (as
/__ / Soliciting Material Pursuant to permitted by
Rule 14a-11(c) or Rule 14a-12 Rule 14a-6(e)(2))
FIRST FINANCIAL BANCORP, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FIRST FINANCIAL BANCORP, INC.
(NAME OF PERSON(S) FILING PROXY STATEMENT)
Payment of filing fee (check the appropriate box):
/__/No fee required.
/__/Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
1) Title of each class of securities to which transaction
applied:
REGISTRANT'S COMMON STOCK, $0.10 PAR VALUE PER SHARE
2) Aggregate number of securities to which transaction applies:
415,452 OUTSTANDING SHARES PLUS 11,461 SHARES PURSUANT TO
CANCELLATION OF OPTIONS
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:
$30.00 PER SHARE FOR 415,452 OUTSTANDING SHARES
$22.00 PER SHARE FOR 8,061 SHARES PURSUANT TO CANCELLATION
OF OPTIONS
$14.375 PER SHARE FOR 1,000 SHARES PURSUANT TO CANCELLATION
OF OPTIONS
$14.50 PER SHARE FOR 2,400 SHARES PURSUANT TO CANCELLATION
OF OPTIONS
4) Proposed maximum aggregate value of transaction:
$12,690,077.00
5) Total fee paid:
$2,538.00
/ x /Fee paid previously with preliminary materials.
/__/Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of this filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement:
3) Filing Party:
4) Date Filed:
<PAGE>
July 23, 1998
Dear Stockholder:
We cordially invite you to attend a Special Meeting of Stockholders of
First Financial Bancorp, Inc. ("First Financial"). The Special
Meeting will be held in the Meeting Room of the Ida Public Library,
320 North State Street, Belvidere, Illinois at 2:00 p.m., (local time)
on Thursday, August 20, 1998.
As described in the accompanying Notice of Special Meeting of
Stockholders and Proxy Statement, at the Special Meeting you will be
asked to consider and vote upon a proposal to approve an Agreement of
Merger, dated as of May 7, 1998 (the "Merger Agreement") pursuant to
which First Financial has agreed to merge (the "Merger") with
Blackhawk Acquisition Corp. ("Acquisition Corp."), a Delaware
corporation and wholly owned subsidiary of Blackhawk Bancorp, Inc., a
Wisconsin corporation ("Blackhawk"). In connection with the Merger,
holders of First Financial common stock will be entitled to receive
$30.00 in cash for each share held, subject to downward adjustment as
more fully described in the accompanying Proxy Statement.
Consummation of the Merger is subject to certain customary conditions,
including the approval and adoption of the Merger Agreement by First
Financial's stockholders and the appropriate regulatory approval.
Upon consummation of the Merger, First Financial will become a wholly
owned subsidiary of Blackhawk. In addition, you will be asked to
consider and vote upon a proposal to adjourn the Special Meeting in
the event that First Financial management should determine in its sole
discretion, at the time of the Special Meeting, that such adjournment
is in the best interest of First Financial and its stockholders, which
would include adjourning the Special Meeting to enable management to
solicit additional proxies, which may be necessary to ensure approval
of the Merger Agreement.
The Board of Directors of First Financial has determined that the
Merger is fair to, and in the best interest of, First Financial and
its stockholders and has approved the Merger Agreement. The Board
unanimously recommends that you vote "FOR" the approval and adoption
of the Merger Agreement. Howe Barnes Investments, Inc., First
Financial's financial advisor in connection with the Merger, has
rendered a written opinion to First Financial's Board that the
consideration to be received by First Financial's stockholders in the
Merger is fair, from a financial point of view, to such holders. The
Notice of Special Meeting of Stockholders and Proxy Statement which
follow describe the Merger in greater detail and provide specific
information concerning the Special Meeting. Please read these
materials carefully.
PLEASE MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS SOON AS
POSSIBLE EVEN IF YOU CURRENTLY PLAN TO ATTEND THE SPECIAL MEETING.
Your vote is important, regardless of the number of shares that you
own. This will not prevent you from voting in person, but will assure
that your vote is counted if you are unable to attend the meeting.
YOU SHOULD NOT SEND IN CERTIFICATES FOR YOUR SHARES OF FIRST FINANCIAL
<PAGE>
COMMON STOCK AT THIS TIME. On behalf of the Board of Directors, we
urge you to vote for approval of the Merger Agreement. Your continued
support and interest in First Financial are greatly appreciated.
Sincerely,
/s/ Steven C. Derr
-------------------------------------
Steven C. Derr
President and Chief Executive Officer
<PAGE>
FIRST FINANCIAL BANCORP, INC.
121 East Locust Street
Belvidere, Illinois 61008
(815) 544-3167
NOTICE OF
SPECIAL MEETING OF STOCKHOLDERS
To be Held on August 20, 1998
Notice is hereby given that a Special Meeting of Stockholders of
First Financial Bancorp, Inc. ("First Financial") will be held in the
Meeting Room of the Ida Public Library, 320 North State Street,
Belvidere, Illinois, on Thursday, August 20, 1998 at 2:00 p.m., local
time.
A Proxy Card and a Proxy Statement for the Special Meeting are
enclosed.
The Special Meeting is for the following purposes, which are more
completely set forth in the accompanying Proxy Statement:
1. To consider and vote upon a proposal to approve and adopt an
Agreement of Merger, dated as of May 7, 1998 (the "Merger
Agreement"), among First Financial, Blackhawk Bancorp., Inc., a
Wisconsin corporation ("Blackhawk"), and Blackhawk Acquisition
Corp., a Delaware corporation and wholly owned subsidiary of
Blackhawk ("Acquisition Corp."). As more fully described in the
Proxy Statement, pursuant to the Merger Agreement, Acquisition
Corp. will merge with and into First Financial (the "Merger")
with First Financial being the surviving corporation, and First
Financial will thereby become a wholly owned subsidiary of
Blackhawk. In the Merger, each outstanding share of common
stock, par value $.10 per share, of First Financial ("First
Financial Common Stock") (excluding (i) shares held by any First
Financial stockholder who perfects appraisal rights, (ii) shares
held by First Financial in treasury, (iii) shares owned by
certain recognition and retention plans for employees and outside
directors of First Federal Savings Bank of Belvidere (the
"Recognition and Retention Plans") and (iv) shares held by
Blackhawk) will be converted into $30.00 in cash, subject to
downward adjustment as more fully described in the Proxy
Statement.
2. To consider and vote upon a proposal to adjourn the Special
Meeting in the event that First Financial's management should
determine in its sole discretion, at the time of the Special
Meeting, that such adjournment is in the best interest of First
Financial and its stockholders, which would include adjourning
the Special Meeting to enable management to solicit additional
proxies which may be necessary to ensure approval of the Merger
Agreement.
Stockholders of record at the close of business on July 16, 1998,
are entitled to notice of and to vote at the Special Meeting and any
adjournment or postponement thereof. A list of stockholders entitled
<PAGE>
to vote at the Special Meeting will be available for inspection at the
Special Meeting and for a period of ten days prior to the Special
Meeting.
Any stockholder entitled to vote at the Special Meeting shall
have the right to dissent from the Merger and to receive payment of
the fair value of the shares of First Financial Common Stock held of
record by such stockholder upon compliance with the provisions of
Section 262 of the Delaware General Corporation Law, the full text of
which is included as Appendix C to the Proxy Statement, which is
attached to this Notice of Special Meeting. For a summary of the
appraisal rights of First Financial stockholders, see "Appraisal
Rights" in the Proxy Statement.
By Order of the Board of Directors
/s/ Patricia J. McCoy
----------------------------------
Patricia J. McCoy
Secretary
<PAGE>
FIRST FINANCIAL BANCORP, INC.
121 East Locust Street
Belvidere, Illinois 61008
(815) 544-3167
PROXY STATEMENT
This Proxy Statement is furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of First
Financial Bancorp, Inc. ("First Financial") to be used at the Special
Meeting of Stockholders of First Financial (the "Meeting"), which will
be held in the Meeting Room of the Ida Public Library, 320 North State
Street, Belvidere, Illinois, on Thursday, August 20, 1998 at 2:00
p.m., local time, and any adjournments or postponement thereof. This
Proxy Statement, the accompanying Notice of Special Meeting of
Stockholders and the accompanying Proxy Card are first being mailed to
stockholders on or about July 23, 1998.
At the Special Meeting, holders of record of First Financial
Common Stock as of the close of business on July 16, 1998 will
consider and vote upon a proposal to approve and adopt an Agreement of
Merger, dated as of May 7, 1998 (the "Merger Agreement"), among First
Financial, Blackhawk Bancorp, Inc., a Wisconsin corporation
("Blackhawk"), and Blackhawk Acquisition Corp., a Delaware corporation
and wholly owned subsidiary of Blackhawk ("Acquisition Corp."), a copy
of which is attached to this Proxy Statement as Appendix A. In
addition, holders of record of First Financial Common Stock will
consider and vote upon a proposal to adjourn the Special Meeting in
the event that First Financial's management should determine in its
sole discretion, at the time of the Special Meeting, that such
adjournment is in the best interest of First Financial and its
stockholders, which would include adjourning the Special Meeting to
enable management to solicit additional proxies, which may be
necessary to ensure approval of the Merger Agreement.
As more fully described herein, pursuant to the Merger Agreement,
Acquisition Corp. will merge with and into First Financial (the
"Merger") with First Financial being the surviving corporation, and
First Financial will thereby become a wholly owned subsidiary of
Blackhawk. In the Merger, each outstanding share of First Financial
Common Stock (excluding shares held by any First Financial stockholder
who perfects appraisal rights, shares held by First Financial in
treasury, shares owned by certain recognition and retention plans for
employees and outside directors of First Federal Savings Bank (the
"Recognition and Retention Plans") and shares held by Blackhawk) will
be converted into $30.00 in cash, subject to downward adjustment (the
"Merger Price"). The bid and asked prices per share of the First
Financial Common Stock on May 6, 1998, the day prior to the
announcement of the Merger, were $25.25 and $25.75, respectively.
<PAGE>
THE FIRST FINANCIAL BOARD UNANIMOUSLY RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED IN THIS PROXY STATEMENT AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY FIRST FINANCIAL. THIS PROXY
STATEMENT DOES NOT CONSTITUTE A SOLICITATION BY ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION. THE
DELIVERY OF THIS DOCUMENT SHALL NOT UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF FIRST
FINANCIAL SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE THEREOF.
AVAILABLE INFORMATION
First Financial is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC").
Copies of such reports, proxy statements and other information can be
obtained, upon payment of prescribed fees, from the SEC at the Public
Reference Room, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549. In addition, such reports, proxy statements and other
information can be inspected and copied at the SEC's facilities
referred to above and the SEC's Regional Offices at 7 World Trade
Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500
West Madison, Suite 1400, Chicago, Illinois 60661. The SEC maintains
a web site on the World Wide Web that contains reports, proxy
statements and other information regarding issuers that file
electronically with the SEC. The address of such site is
"http://www.sec.gov."
<PAGE>
TABLE OF CONTENTS
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Special Meeting . . . . . . . . . . . . . . . . . . . . . . . . 1
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Reasons for the Merger . . . . . . . . . . . . . . . . . . . . . . 2
Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . . 2
Interests of Certain Persons in the Merger . . . . . . . . . . . . 3
Regulatory Approvals . . . . . . . . . . . . . . . . . . . . . . . 5
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . 5
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . 5
Appraisal Rights . . . . . . . . . . . . . . . . . . . . . . . . . 5
First Financial Common Stock Data . . . . . . . . . . . . . . . . . 6
THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Blackhawk Bancorp, Inc. . . . . . . . . . . . . . . . . . . . . . . 7
Blackhawk Acquisition Corp. . . . . . . . . . . . . . . . . . . . . 7
First Financial Bancorp, Inc. . . . . . . . . . . . . . . . . . . . 7
THE SPECIAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . 8
Matters to be Considered at the Special Meeting . . . . . . . . . . 8
Record Date and Voting . . . . . . . . . . . . . . . . . . . . . . 9
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Revocability of Proxies . . . . . . . . . . . . . . . . . . . . . . 10
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . 11
BENEFICIAL STOCK OWNERSHIP . . . . . . . . . . . . . . . . . . . . 11
Security Ownership of Management . . . . . . . . . . . . . . . . . 11
Security Ownership of Certain Beneficial Owners . . . . . . . . . . 13
THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Background of The Merger . . . . . . . . . . . . . . . . . . . . . 16
Reasons for the Merger; Recommendation of The First Financial Board 22
Reasons for the Merger -- First Financial . . . . . . . . . . . . . 22
Reasons for the Merger -- Blackhawk . . . . . . . . . . . . . . . . 23
Opinion of Financial Advisor . . . . . . . . . . . . . . . . . . . 24
Interests of Certain Persons in the Merger . . . . . . . . . . . . 28
Employee Benefit Plan Matters . . . . . . . . . . . . . . . . . . . 34
Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Payment Procedures and Paying Agent . . . . . . . . . . . . . . . . 35
Representations and Warranties . . . . . . . . . . . . . . . . . . 36
Conduct of Business Pending the Merger . . . . . . . . . . . . . . 37
Conditions to Consummation of the Merger . . . . . . . . . . . . . 39
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Termination and Termination Fees . . . . . . . . . . . . . . . . . 39
Regulatory Approval . . . . . . . . . . . . . . . . . . . . . . . . 41
Accounting Treatment . . . . . . . . . . . . . . . . . . . . . . . 41
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Certain Federal Income Tax Consequences . . . . . . . . . . . . . . 41
APPRAISAL RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . 42
i
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ADJOURNMENT OF SPECIAL MEETING . . . . . . . . . . . . . . . . . . 46
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
First Federal Savings Bank . . . . . . . . . . . . . . . . . . . . 47
Lending Activities . . . . . . . . . . . . . . . . . . . . . . . . 49
Delinquencies and Classified Assets . . . . . . . . . . . . . . . . 66
Securities Portfolio Maturities . . . . . . . . . . . . . . . . . . 71
Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . . . 72
Federal and State Taxation . . . . . . . . . . . . . . . . . . . . 78
State and Local Taxation . . . . . . . . . . . . . . . . . . . . . 79
Description of Property . . . . . . . . . . . . . . . . . . . . . . 80
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . 80
Market for Common Equity and Related Shareholder Matters . . . . . 81
REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Pending Financial Modernization Legislation . . . . . . . . . . . . 82
Federal Regulation of Savings Institutions . . . . . . . . . . . . 83
Insurance of Accounts and Regulation by the FDIC . . . . . . . . . 84
Regulatory Capital Requirements . . . . . . . . . . . . . . . . . . 84
Limitations on Dividends and Other Capital Distributions . . . . . 87
Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Qualified Thrift Lender Test . . . . . . . . . . . . . . . . . . . 89
Community Reinvestment Act . . . . . . . . . . . . . . . . . . . . 90
Transactions with Affiliates . . . . . . . . . . . . . . . . . . . 90
Proposed Rules Governing Financial Derivatives . . . . . . . . . . 91
Holding Company Regulation . . . . . . . . . . . . . . . . . . . . 91
Federal Reserve System . . . . . . . . . . . . . . . . . . . . . . 92
Federal Home Loan Bank System . . . . . . . . . . . . . . . . . . . 92
MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . 93
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Financial Condition at March 31, 1998 . . . . . . . . . . . . . . . 94
RESULTS OF OPERATIONS - COMPARISON OF THREE MONTHS ENDED MARCH 31,
1998 AND 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 95
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . 95
Provision For Loan Losses . . . . . . . . . . . . . . . . . . . . 95
Non-Interest Income . . . . . . . . . . . . . . . . . . . . . . . 95
Non-Interest Expense . . . . . . . . . . . . . . . . . . . . . . 95
Secondary Mortgage Market Loan Activity . . . . . . . . . . . . . 96
Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 97
COMPARISON OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL
CONDITION AT AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER
31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
RESULTS OF OPERATIONS-COMPARISON OF YEAR ENDED DECEMBER 31, 1997
TO YEAR-END DECEMBER 31, 1996 . . . . . . . . . . . . . . . . . . 99
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
ii
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Recent Accounting Developments . . . . . . . . . . . . . . . . . 102
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . 103
Asset/Liability Management . . . . . . . . . . . . . . . . . . . 104
Rate/Volume Analysis . . . . . . . . . . . . . . . . . . . . . . 108
Average Balance Sheets . . . . . . . . . . . . . . . . . . . . . 109
OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . 110
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . F-1
APPENDICES
----------
Appendix A Agreement of Merger
Appendix B Fairness Opinion
Appendix C Appraisal Rights
iii
<PAGE>
SUMMARY
The following is a summary of the material features of the
Merger. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained elsewhere in this
Proxy Statement or in the accompanying appendices. STOCKHOLDERS ARE
URGED TO READ THIS PROXY STATEMENT AND THE APPENDICES HERETO IN THEIR
ENTIRETY.
THE PARTIES
BLACKHAWK BANCORP, INC. Blackhawk, a Wisconsin corporation, was
incorporated under the laws of the state of Wisconsin in November
1989. Blackhawk owns and operates one subsidiary financial
institution, Blackhawk State Bank, located in Beloit, Wisconsin, with
additional offices in Rochelle and Oregon, Illinois. Blackhawk's
principal executive offices are located at 400 Broad St., Beloit,
Wisconsin 53511.
BLACKHAWK ACQUISITION CORP. Acquisition Corp., a wholly owned
subsidiary of Blackhawk, is a Delaware corporation with its principal
executive offices located in Beloit, Wisconsin. Acquisition Corp. was
formed in May, 1998 for the sole purpose of facilitating the Merger.
Pursuant to the terms of the Merger Agreement, Acquisition Corp. will
merge with and into First Financial.
FIRST FINANCIAL BANCORP, INC. First Financial was incorporated
under Delaware law in June 1993. First Financial is currently
conducting business as a savings and loan holding company and its
principal business is the business of First Federal Savings Bank (the
"Bank"). First Financial's principal executive offices are located at
121 East Locust Street, Belvidere, Illinois, 61008 (telephone number
(815) 544-3167.) For a discussion of the business conducted by First
Financial and the Bank, see "BUSINESS."
THE SPECIAL MEETING
The Special Meeting is scheduled to be held in the Meeting Room
of the Ida Public Library, 320 North State Street, Belvidere, Illinois
at 2:00 p.m., (local time) on Thursday, August 20, 1998. At the
Special Meeting, holders of First Financial Common Stock will consider
and vote upon the approval and adoption of the Merger Agreement. A
copy of the Merger Agreement is attached to this Proxy Statement as
Appendix A. In addition to voting upon the Merger Agreement, the
First Financial stockholders are being asked to consider and vote upon
a proposal to adjourn the Special Meeting in the event that First
Financial management should determine in its sole discretion, at the
time of the Special Meeting, that such adjournment is in the best
interest of First Financial and its stockholders. First Financial's
Board has fixed the close of business on July 16, 1998 as the record
date for the determination of the holders of First Financial Common
Stock entitled to receive notice of, and to vote at, the Special
Meeting. Only holders of record of First Financial Common Stock on
1
<PAGE>
such date will be entitled to vote at the Special Meeting and at any
postponement or adjournment thereof. The affirmative vote of a
majority of the outstanding shares of First Financial Common Stock is
required in order to approve and adopt the Merger Agreement.
THE MERGER
The Merger Agreement contemplates that Blackhawk will acquire
First Financial through the merger of Acquisition Corp. into First
Financial, with First Financial being the surviving corporation. As a
result of the Merger, First Financial will become a wholly owned
subsidiary of Blackhawk, and each share of First Financial Common
Stock outstanding immediately prior to the Effective Time (as defined
herein), other than shares as to which appraisal rights have been duly
asserted and perfected in accordance with Delaware law, shares held by
First Financial in treasury, shares owned pursuant to the Recognition
and Retention Plans and shares held by Blackhawk, will be converted
into the right to receive the Merger Price of $30.00 in cash, subject
to downward adjustment. For a complete discussion of the potential
downward adjustments to the Merger Price, see "THE MERGER--The
Merger."
In addition, at the Effective Time each holder of a Stock Option
will receive a cash payment, in full satisfaction of such Stock
Option, equal to the product of (i) the number of shares of First
Financial Common Stock subject to such Stock Option and (ii) the
amount, if any, by which the Merger Price exceeds the exercise price
per share of such Stock Options, net of any cash that must be withheld
under federal and state income and employment tax requirements.
REASONS FOR THE MERGER
The First Financial Board has approved the Merger Agreement and
has determined that the Merger is fair to, and in the best interest
of, First Financial and its stockholders. The First Financial Board
therefore recommends that holders of First Financial Common Stock vote
"FOR" adoption and approval of the Merger Agreement. In reaching its
determination that the Merger Agreement is fair to, and in the best
interests of, First Financial and holders of First Financial Common
Stock, the First Financial Board considered a number of factors, both
from a short-term and a long-term perspective. For a discussion of
the factors considered by the First Financial Board, see "THE MERGER--
Reasons for the Merger."
OPINION OF FINANCIAL ADVISOR
Howe Barnes Investments, Inc. ("Howe Barnes") has delivered to
the Board of Directors of First Financial its written opinion, dated
July 23, 1998, to the effect that, as of such date, the Merger Price
is fair, from a financial point of view, to the holders of First
Financial Common Stock (other than Blackhawk and its affiliates). The
full text of the opinion of Howe Barnes, which sets forth the
assumptions made, procedures followed, matters considered and
2
<PAGE>
limitations on the review undertaken, is attached as Appendix B hereto
and should be read in its entirety in connection with this Proxy
Statement. See "The Merger--Opinion of Financial Advisor."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of First Financial's management, the Bank's
management and the Board of Directors of the Bank and the First
Financial Board may be deemed to have interests in the Merger in
addition to their interests, if any, as holders of First Financial
Common Stock. The First Financial Board was aware of these factors
and considered them, among other matters, in approving the Merger
Agreement and the transactions contemplated thereby.
Blackhawk has agreed, from and after the Effective Time, to
provide indemnification in certain instances to each present and
former director and officer of First Financial and the Bank. In
addition, First Financial will purchase prior to the Effective Time a
directors' and officers' liability insurance policy for a period of
three years after the Effective Time to cover present and former
directors and officers of First Financial and the Bank. See "THE
MERGER--Interest of Certain Persons in the Merger--Indemnification."
As a result of the Merger, directors, officers and employees of
First Financial and its subsidiaries may receive additional benefits
in connection with the First Financial benefit plans and programs.
See "THE MERGER AGREEMENT--Employee Benefit Plans."
Blackhawk has agreed that it will perform and satisfy the terms
of (a) the employment agreement by and among First Financial, the Bank
and Steven C. Derr, (b) the severance agreements by and among First
Financial, the Bank and each of Steven C. Derr, Keith D. Hill, Robert
W. Opperman and Donald J. Kucera, respectively, (c) the supplemental
executive agreements relating to "gross up" for any excess parachute
amounts under Section 280G of the Code by and among First Financial,
the Bank and Messrs. Derr and Hill, and (d) the executive salary
continuation agreement by and between the Bank and David L. Beasley,
all as in effect on the date of the Merger Agreement. See "THE
MERGER--Interests of Certain Persons in the Merger--Employment,
Severance and Supplemental Agreements."
As of the Effective Time, the loan between First Financial and
the First Federal Savings Bank of Belvidere Employee Stock Ownership
Plan (the "First Federal ESOP") shall be repaid in full and, as soon
as practicable after all assets have been allocated, the First Federal
ESOP shall be terminated. See "THE MERGER--Employee Benefit Plan
Matters--Employee Stock Ownership Plan."
At the Effective Time, the First of Belvidere Profit Sharing Plan
(the "First of Belvidere PSP") shall be continued in effect.
Thereafter, Blackhawk may elect to terminate the First of Belvidere
PSP or merge it with a tax-qualified plan maintained by Blackhawk.
See "THE MERGER--Employee Benefit Plan Matters--Profit Sharing Plan."
3
<PAGE>
As of the Record Date, directors and executive officers of First
Financial and the Bank beneficially owned an aggregate of 37,944
shares of First Financial Common Stock (exclusive of shares which
could be acquired upon exercise of Stock Options or awarded under the
Recognition and Retention Plans). Assuming the Merger Price is $30.00
per share, these directors and executive officers will receive a total
of approximately $1,138,320. See "THE MERGER--Interests of Certain
Persons in the Merger--Share Ownership."
Certain Members of the Board of Directors and management hold
Stock Options to purchase shares of First Financial Common Stock. The
Stock Options will be canceled at the Effective Time and the holder
thereof will receive an amount in cash equal to the difference between
the Merger Price and the strike price of the Stock Option. See "THE
MERGER--Interests of Certain Persons in the Merger--Stock Options."
Pursuant to the terms of the Merger Agreement, all awards of
unvested First Financial Common Stock under the Recognition and
Retention Plans granted prior to the Effective Time will be considered
shares of outstanding First Financial Common Stock as of the Effective
Time, and will entitle grantees thereof to receive the Merger Price in
exchange for such awarded shares. See "The Merger -- Interests of
Certain Persons in the Merger -- Accelerated Vesting Under the
Recognition and Retention Plans."
Assuming a Merger Price of $30.00 per share, the aggregate cash
benefit of the cancellation of Stock Options and accelerated vesting
of the unvested Recognition and Retention Plans awards for the
following directors and executive officers would be as follows:
4
<PAGE>
DIRECTOR AND/OR CASH CONSIDERATION
EXECUTIVE OFFICER TO BE RECEIVED
----------------- ------------------
Steven C. Derr 150,546
Keith D. Hill 21,875*
Donald J. Kucera 11,600
Patricia J. McCoy 11,572
Nancy Sylvester 10,150
Richard Winkelman 15,224
* Does not include tax reimbursement pursuant to the
Recognition and Retention Plan applicable to Mr. Hill.
REGULATORY APPROVALS
The Merger cannot proceed in the absence of certain regulatory
approvals, including the approval of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). The necessary
application was filed with the Federal Reserve Board on June 4, 1998.
See "THE MERGER--Regulatory Approvals."
ACCOUNTING TREATMENT
The Merger will be accounted for by Blackhawk under the purchase
method of accounting. Under this method of accounting, the purchase
price will be allocated to assets acquired and liabilities assumed
based on their estimated fair values at the Effective Time.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The cancellation of shares of First Financial Common Stock in
exchange for cash pursuant to the Merger will be a taxable transaction
to holders of First Financial Common Stock for federal income tax
purposes and may also be a taxable transaction under applicable state,
local and other tax laws. Holders of First Financial Common Stock are
encouraged to consult their tax advisors concerning the federal income
tax consequences of the Merger in their particular circumstance, as
well as any tax consequences arising under foreign, state or local
law. See "THE MERGER--Certain Federal Income Tax Consequences."
APPRAISAL RIGHTS
Under Section 262 of the Delaware General Corporation Law (the
"DGCL"), any holder of First Financial Common Stock who does not wish
to accept the Merger consideration has the right to seek an appraisal
and be paid the "fair value" in cash of his or her First Financial
Common Stock as judicially determined, provided that such holder
complies with the provisions of Section 262 of the DGCL, the text of
which is set forth in Appendix C hereto. Holders of record of First
Financial Common Stock who desire to exercise their appraisal rights
must fully satisfy all of the conditions of Section 262. A written
5
<PAGE>
demand for appraisal of First Financial Common Stock (which demand
must identify the holder and expressly request appraisal) must be
delivered before the taking of the vote on the approval and adoption
of the Merger Agreement to: First Financial Bancorp. Inc., 121 East
Locust Street, Belvidere, Illinois 61008, Attention: Secretary. Such
written demand for appraisal of First Financial Common Stock must be
in addition to and separate from any proxy or vote abstaining from or
voting against the approval and adoption of the Merger Agreement.
Voting against, abstaining from or failing to vote will not constitute
a demand for appraisal under Section 262, nor will it constitute a
waiver of such stockholder's appraisal rights. Holders of First
Financial Common Stock electing to exercise their appraisal rights
under Section 262 must not vote for the approval and adoption of the
Merger Agreement or consent thereto in writing. Voting in favor of
the approval and adoption of the Merger Agreement, or delivering a
proxy in connection with the Special Meeting (unless the proxy votes
against, or expressly abstains from the vote on, the approval and
adoption of the Merger Agreement), will constitute a waiver of the
stockholder's right of appraisal and will nullify any written demand
for appraisal submitted by the stockholder. See "Appraisal Rights"
and Appendix C for a more complete discussion of appraisal rights.
FIRST FINANCIAL COMMON STOCK DATA
Shares of First Financial Common Stock are traded infrequently in
the over-the-counter market through the OTC Bulletin Board under the
symbol "FFBI". The bid and asked prices per share of the First
Financial Common Stock on May 6, 1998, the day prior to the
announcement of the Merger, were $25.25 and $25.75, respectively.
The book value per share of First Financial Common Stock at
December 31, 1997 was $17.94 and at March 31, 1998 was $18.58. The
diluted net income per share of First Financial Common Stock for the
year ended December 31, 1997 was $.30 and for the three months ended
March 31, 1998 was $0.17. First Financial did not declare or pay any
cash dividends during the year ended December 31, 1997 and the three
months ended March 31, 1998.
As of March 31, 1998, First Financial had approximately 300
stockholders of record (which includes nominees for beneficial owners
holding shares in "street name").
6
<PAGE>
THE PARTIES
Blackhawk Bancorp, Inc.
Blackhawk, a Wisconsin corporation, was incorporated under the
laws of the state of Wisconsin in November 1989. Blackhawk owns and
operates one subsidiary financial institution, Blackhawk State Bank
("BSB"), located in Beloit, Wisconsin, with additional offices in
Rochelle and Oregon, Illinois. Blackhawk's principal executive
offices are located at 400 Broad Street, Beloit, Wisconsin 53511
(telephone number (608) 364-8911).
BSB is a Wisconsin-chartered commercial bank operating out of
five branches in the Greater Beloit Area, two branches in Rochelle,
Illinois and one branch in Oregon, Illinois. BSB has two
subsidiaries, NEA Investments, Inc. and RSL, Inc., a company
principally engaged in finance company activities through its
subsidiary Midland Acceptance Corp. BSB's principal business consists
of attracting deposits from the general public and originating loans.
In addition, BSB invests in various types of securities, operates a
trust department and maintains an office of Robert Thomas Securities,
Inc.
As of March 31, 1998, Blackhawk had total consolidated assets of
$201,061,000, total deposits of $158,617,000, and stockholders' equity
of $23,422,000.
BLACKHAWK ACQUISITION CORP.
Acquisition Corp., a wholly owned subsidiary of Blackhawk, is a
Delaware corporation with its principal executive offices located at
400 Broad Street, Beloit, Wisconsin 53511 (telephone number (608) 364-
8911). Acquisition Corp. was formed in May, 1998 for the sole purpose
of facilitating the Merger. Pursuant to the terms of the Merger
Agreement, at the Effective Time, Acquisition Corp. will merge with
and into First Financial.
FIRST FINANCIAL BANCORP, INC.
First Financial is a Delaware corporation organized on June 25,
1993 by First Federal Savings and Loan Association of Belvidere (the
"Mutual Association") for the purpose of acquiring all of the capital
stock of the Bank issued in the conversion of the Mutual Association
from mutual to stock form. First Financial is currently registered as
a savings and loan holding company with the Office of Thrift
Supervision, and its sole business is the business of the Bank. The
Bank's predecessor, First Federal Savings and Loan Association, was
founded in July 1922 as "Belvidere Building and Loan Association," a
state-chartered stock institution. In 1936, it was converted to
mutual ownership under the name "Belvidere Federal Savings and Loan
Association." In 1965, the Bank changed its name to "First Federal
Savings and Loan Association of Belvidere." In 1995, the Bank changed
its name from "First Federal Savings Bank of Belvidere" to "First
7
<PAGE>
Federal Savings Bank." The principal assets of First Financial are
its investment in the Bank's common stock and a loan to the First
Federal ESOP. First Financial's principal revenue source is interest
and dividends on its investments. At March 31, 1998, First Financial
had, on a consolidated basis, total assets of $82,117,000, and
stockholders' equity of $7,718,000. Unless the context requires
otherwise, references herein to First Financial shall be deemed to
include the Bank.
The Bank is a community-oriented savings institution engaged
primarily in the business of originating one-to four-family
residential mortgage loans in its primary market area. To a lesser
extent, the Bank also originates multi-family and commercial real
estate loans and a variety of consumer loans. The Bank also invests
in various types of securities and assets that are permissible
investments for federal savings banks, including federal funds,
mortgage-backed securities, and securities issued or guaranteed by the
United States Government or agencies thereof. The Bank funds its
lending and investment activities primarily from deposits, repayment
of principal and interest on its mortgage loans, and by borrowing from
the Federal Home Loan Bank of Chicago (the "FHLB").
First Financial's principal executive offices are located at 121
East Locust Street, Belvidere, Illinois 61008 (telephone number (815)
554-3167).
THE SPECIAL MEETING
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
Each copy of this Proxy Statement mailed to holders of First
Financial Common Stock is accompanied by a Proxy Card furnished in
connection with the solicitation of proxies by the First Financial
Board for use at the Special Meeting. The Special Meeting is
scheduled to be held in the Meeting Room of the Ida Public Library,
320 North State Street, Belvidere, Illinois at 2:00 p.m., (local time)
on Thursday, August 20, 1998. At the Special Meeting, holders of
First Financial Common Stock will consider and vote upon the approval
and adoption of the Merger Agreement. A copy of the Merger Agreement
is attached to this Proxy Statement as Appendix A. In addition to
voting upon the Merger Agreement, First Financial's stockholders are
being asked to consider and vote upon a proposal to adjourn the
Special Meeting in the event that First Financial's management should
determine in its sole discretion, at the time of the Special Meeting,
that such adjournment is in the best interest of First Financial and
its stockholders.
HOLDERS OF FIRST FINANCIAL'S COMMON STOCK ARE REQUESTED TO
PROMPTLY SIGN, DATE AND RETURN THE ACCOMPANYING PROXY CARD TO FIRST
FINANCIAL IN THE ENCLOSED POSTAGE-PAID, ADDRESSED ENVELOPE. FAILURE
TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE SPECIAL
MEETING WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER
AGREEMENT.
8
<PAGE>
RECORD DATE AND VOTING
The First Financial Board has fixed the close of business on July
16, 1998 as the record date (the "Record Date") for the determination
of the holders of First Financial Common Stock entitled to receive
notice of and to vote at the Special Meeting. Only holders of record
of First Financial Common Stock on the Record Date will be entitled to
vote at the Special Meeting and at any postponement or adjournment
thereof. As of the close of business on the Record Date, there were
415,452 shares of First Financial Common Stock outstanding.
Each holder of First Financial Common Stock on the Record Date
will be entitled to one vote for each share held of record upon each
matter properly submitted at the Special Meeting and at any
postponement or adjournment thereof. The presence, in person or by
proxy, of the holders of at least a majority of the total number of
outstanding shares of First Financial Common Stock entitled to vote at
the Special Meeting is necessary to constitute a quorum at the Special
Meeting.
First Financial's Certificate of Incorporation provides that
prior to June 25, 1998 record holders of First Financial Common Stock
who beneficially own in excess of 10% of the outstanding shares of
First Financial Common Stock (the "10% Limit") are not entitled to any
vote in respect of the shares held in excess of the 10% Limit. A
person or entity is deemed to beneficially own shares owned by an
affiliate of, as well as such persons acting in concert with, such
person or entity. First Financial's Certificate of Incorporation
authorizes the Board (i) to make all determinations necessary to
implement and apply the 10% Limit, including determining whether
persons or entities are acting in concert, and (ii) to demand that any
person who is reasonably believed to beneficially own stock in excess
of the 10% Limit supply information to First Financial to enable the
Board to implement and apply the 10% Limit.
HOLDERS OF FIRST FINANCIAL COMMON STOCK SHOULD NOT FORWARD ANY
STOCK CERTIFICATES WITH THEIR PROXY CARDS. Instructions regarding the
exchange of stock certificates for the Merger Consideration will be
furnished at a later date. See "THE MERGER--Payment Procedures and
Paying Agent."
VOTE REQUIRED
The affirmative vote of a majority of the shares of First
Financial Common Stock outstanding on the Record Date is required in
order to approve and adopt the Merger Agreement. BECAUSE APPROVAL OF
THE MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF
THE TOTAL OUTSTANDING SHARES OF FIRST FINANCIAL COMMON STOCK, AND NOT
A MAJORITY OF THE SHARES ACTUALLY VOTED, THE FAILURE TO SUBMIT A PROXY
CARD OR TO VOTE IN PERSON AT THE SPECIAL MEETING WILL HAVE THE SAME
EFFECT AS A VOTE "AGAINST" THE MERGER AGREEMENT. A properly executed
proxy marked "ABSTAIN," although counted for purposes of determining
whether there is a quorum at the Special Meeting, will not be voted
9
<PAGE>
and will have the same effect as a vote "AGAINST" the Merger
Agreement. Broker non-votes (referring to where a broker or other
nominee physically indicates on the proxy that it does not have
discretionary authority as to certain shares of First Financial Common
Stock to vote on a particular matter) will be counted for purposes of
determining whether there is a quorum, but will not count in the
determination of the voting results.
Shares of First Financial Common Stock represented by properly
executed proxies will be voted in accordance with the instructions
indicated on the proxies. IF NO INSTRUCTIONS ARE INDICATED, PROPERLY
EXECUTED PROXIES WILL BE VOTED "FOR" THE PROPOSAL TO APPROVE THE
MERGER AGREEMENT AND "FOR" THE PROPOSAL TO ADJOURN THE SPECIAL MEETING
IN THE DISCRETION OF FIRST FINANCIAL'S MANAGEMENT AND OTHERWISE IN THE
DISCRETION OF PROXY HOLDERS AS TO ANY OTHER MATTER WHICH MAY PROPERLY
COME BEFORE THE SPECIAL MEETING OR ANY ADJOURNMENT OR POSTPONEMENT
THEREOF. The grant of a proxy does not preclude a First Financial
stockholder from subsequently revoking such proxy and voting in person
at the Special Meeting.
If a quorum is not obtained, or if fewer shares of First
Financial Common Stock are voted in favor of approval of the Merger
Agreement than the number required for approval, it is expected that
the Special Meeting will be postponed or adjourned for the purpose of
allowing additional time for obtaining additional proxies or votes,
and, at any subsequent reconvening of the Special Meeting, all proxies
will be voted in the same manner as such proxies would have been voted
at the original convening of the Special Meeting (except for any
proxies which have theretofore effectively been revoked or withdrawn).
No vote of Blackhawk stockholders is required in connection with
the Merger Agreement.
The obligations of Blackhawk and First Financial to consummate
the Merger are subject, among other things, to the condition that the
stockholders of First Financial approve and adopt the Merger
Agreement.
REVOCABILITY OF PROXIES
The presence of a stockholder at the Special Meeting will not
automatically revoke such stockholder's proxy. However, a
stockholder may revoke a proxy at any time before its exercise by (i)
delivering to the Secretary of First Financial a written notice of
revocation at or before the Special Meeting, (ii) delivering to the
Secretary of First Financial at or before the Special Meeting a duly
executed proxy bearing a later date or (iii) attending the Special
Meeting, giving oral notice of revocation to the presiding officer of
the meeting, and voting in person. All written notices of revocation
and other communications with respect to the revocation of proxies
should be addressed to First Financial Bancorp, Inc., 121 East Locust
Street, Belvidere, Illinois 61008, Attention: Patricia J. McCoy.
10
<PAGE>
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and
employees of First Financial and the Bank may solicit proxies for the
Special Meeting from First Financial stockholders personally or by
telephone or telegram without remuneration therefor other than the
compensation which such persons otherwise receive in their capacities
as directors, officers and employees. First Financial will also
provide persons, firms, banks and corporations holding shares in their
names or in the names of nominees, which in either case are
beneficially owned by others, proxy materials for transmittal to such
beneficial owners and will reimburse such record owners for their
reasonable expenses in doing so. The cost of solicitation of proxies
for the Special Meeting will be borne by First Financial.
BENEFICIAL STOCK OWNERSHIP
SECURITY OWNERSHIP OF MANAGEMENT
As of June 1, 1998, the directors and executive officers of First
Financial beneficially owned, as a group, 47,099 shares of First
Financial Common Stock (including 9,155 shares which could be acquired
within 60 days thereof upon the exercise of options) representing
approximately 11.34% of such shares outstanding. Mr. Perry D. Hansen
and the directors of First Financial who are also stockholders of
First Financial have each agreed to vote their issued and outstanding
First Financial shares "FOR" approval and adoption of the Merger
Agreement, pursuant to a stockholder voting agreement.
The following table sets forth information, as of June 1, 1998 as
to the First Financial Common Stock beneficially owned by (i) each
director of First Financial and certain executive officers of First
Financial, and (ii) all directors and officers of First Financial as a
group. Shares are deemed to be owned beneficially by each person who
has sole or shared power to vote or to invest such shares, whether or
not such person has any economic interest in the shares. Except as
otherwise indicated, shares are owned with sole voting and investment
power.
11
<PAGE>
<TABLE>
<CAPTION>
NO. OF SHARES
OF COMMON STOCK PERCENT OF
BENEFICIALLY OWNED(1) CLASS(2)
--------------------- ----------
<S> <C> <C>
DIRECTORS
Steven C. Derr 14,237 (6)(3) 3.43%
Douglas M. Kratz 20,077 (4) 4.83
Charles G. Popp 100 (5) *
Nancy Sylvester 1,218 (6) *
James V. Twyning 1,093 (7) *
Richard E. Winkelman 6,387 (6)(8) 1.54
CERTAIN EXECUTIVE OFFICERS
Keith D. Hill 1,367 (6)(9) *
Donald J. Kucera 320 (6) *
Robert W. Opperman 500 (10) *
Patricia J. McCoy 1,800 (11) *
Directors and Officers as a Group 47,099 11.34%
(9 individuals, including all those listed above)
</TABLE>
_________________________
* Less than one percent of the outstanding Common Stock.
(1) Information relating to the number of shares of Common Stock
beneficially owned by directors and executive officers is based
upon information furnished by each person to the Company.
(2) Based upon a total of 415,452 issued and outstanding shares of
Common Stock as of June 1, 1998.
(3) Includes 2142.33 shares allocated to Mr. Derr's account under
the First Federal ESOP. Does not include 1,428.22 non-vested
shares in the First Federal ESOP.
(4) Does not include 20,000 shares held by Mr. Kratz's business
associate, Perry B. Hansen, as to which he disclaims beneficial
ownership.
(5) Includes 100 shares as to which Mr. Popp has shared voting power
with his wife.
(6) Includes shares that could be acquired within 60 days after
June 1, 1998 pursuant to the exercise of stock options as
follows: Mr. Derr, 6843; Mr. Hill, 600; Mr. Kucera, 320;
Ms. Sylvester, 700; and Mr. Winkelman, 692.
(7) Includes 200 shares held by Christine Twyning, Mr. Twyning's
daughters.
(8) Includes 4,275 shares of which Mr. Winkelman has shared
voting power with his wife, and 350 shares which are owned
by his wife.
(9) Includes 25 shares as to which Mr. Hill has shared voting
power with his wife. Includes 742 shares allocated to Mr.
Hill's account under the First Federal ESOP. Does not
include 1114 non-vested shares in the First Federal ESOP
and 250 unvested shares in the Recognition and Retention Plan
applicable to Mr. Hill.
(10) Includes 500 shares as to which Mr. Opperman has shared voting
power with his wife.
(11) Includes 100 shares as to which Ms. McCoy has shared voting
power with her husband. Does not include 783 non-vested shares
in the First Federal ESOP.
12
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following persons are known to First Financial to be the
beneficial owners of more than 5% of the outstanding Common Stock as
of the most recent date prior to the preparation of this Proxy
Statement for which information was available to First Financial.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON STOCK PERCENT OF CLASS
BENEFICIALLY OF COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED STOCK (1)
------------------------------------ ------------ ----------------
<S> <C> <C>
FINANCIAL INSTITUTION PARTNERS, L.P.
HOVDE CAPITAL, INC.
STEVEN D. HOVDE 42,700(2) 10.28%
1629 COLONIAL PARKWAY
INVERNESS, IL 60067
First Federal Savings Bank
Employee Stock Ownership
Plan Trust 30,767(3) 7.41%
Trustees: Nancy Sylvester,
Charles R. Popp and Douglas Kratz
121 East Locust Street
Belvidere, IL 61008-3688
Franklin Resources, Inc.
Charles B. Johnson
Rupert H. Johnson, Jr.
Franklin Advisory Services, Inc. 26,500(4) 6.38%
777 Mariners Island Blvd.
San Mateo, CA 94404
Perry B. Hansen
224 18th Street 20,000(5) 4.81%
Suite 202
Rock Island, IL 60201
S.C. Investments, L.P.
c/o Webb and O'Neill, Inc.
50 N. Brockway, Suite 3-8 21,362(6) 5.14%
P.O. Box 1186
Palatine, IL 60078
</TABLE>
_________________________
(1) Based upon a total of 415,452 shares of Common Stock issued
and outstanding on June 1, 1998.
(2) Based on information provided in a Schedule 13D, dated
November 12, 1996, filed with the Securities and Exchange
Commission by Financial Institution Partners, L.P., Hovde
Capital, Inc. and Steven D. Hovde. According to the filing,
Hovde Capital Inc. is the general partner of Financial
Institution Partners, L.P. and Steven D. Hovde is a controlling
shareholder of Hovde Capital, Inc.
13
<PAGE>
(3) Based on information provided in a Schedule 13G, dated
February 12, 1998, filed with the Securities and Exchange
Commission by First Federal Savings Bank Employee Stock
Ownership Plan Trust.
(4) Based on information provided in a Schedule 13G, dated
February 11, 1998, filed with the Securities and Exchange
Commission by Franklin Resources, Inc. on behalf of itself,
Charles B. Johnson, Rupert H. Johnson, Jr. and Franklin
Advisory Services, Inc. According to the filing, Franklin
Advisory Service, Inc. is an investment advisor, Franklin
Resources, Inc. is the parent holding company and Messrs.
Johnson are control persons pursuant to Rule 13d-1(b)(1)(ii)(G).
(5) Based on information provided in a Schedule 13D, dated June 13,
1997, filed jointly with the Securities and Exchange Commission
by Perry B. Hansen and Douglas M. Kratz. Does not include
20,077 shares held by Mr. Hansen's business associate,
Mr. Kratz, as to which he disclaims beneficial ownership.
See "BENEFICIAL OWNERSHIP -- Security Ownership Management."
(6) Based on information provided in a Schedule 13G, dated
February 17, 1998, filed with the Securities and Exchange
Commission by S.C. Investments, L.P.
14
<PAGE>
THE MERGER
GENERAL
The following information relates to matters contained in the
Merger Agreement which is incorporated herein by reference and
attached hereto as Appendix A. FIRST FINANCIAL STOCKHOLDERS ARE URGED
TO READ THE MERGER AGREEMENT IN ITS ENTIRETY.
THE MERGER
MERGER PRICE. The Merger Agreement contemplates that Blackhawk
will acquire First Financial through the merger of Acquisition Corp.
into First Financial, with First Financial being the surviving
corporation. As a result of the Merger, First Financial will become a
wholly owned subsidiary of Blackhawk, and each share of First
Financial Common Stock outstanding immediately prior to the Effective
Time, other than shares as to which appraisal rights have been duly
asserted and perfected in accordance with Delaware law, shares held by
First Financial in treasury, shares owned by the Recognition and
Retention Plans and shares held by Blackhawk, will be converted into
the right to receive the Merger Price of $30.00 in cash, subject to
the potential downward adjustments described below. The amount of the
Merger Price was determined through arms's length negotiations between
First Financial and Blackhawk. After the Effective Time, stockholders
of First Financial will no longer have an equity interest in First
Financial.
POTENTIAL DECREASE TO MERGER PRICE. If the Closing Equity
(defined below) is determined to be less than $7,560,000, the Merger
Price will be reduced (the "Reduced Merger Price") by an amount equal
to the quotient of (i) the remainder of (A) $7,560,000 less (B) the
Closing Equity, divided by (ii) 426,913 (the number of outstanding
shares and awarded Stock Options of First Financial Common Stock);
however, in no event shall the Merger Price be reduced below $29.00
per share.
Closing Equity is defined as the stockholders' equity of First
Financial as of the Closing Date determined in accordance with
generally accepted accounting principles, consistently applied, but
(i) shall exclude the unrealized gains or losses in the securities
portfolio at the Closing Date; (ii) shall be reduced by any
nonrecurring or extraordinary net gains (including all cumulative
securities gains) in excess of $5,000 since December 31, 1997; and
(iii) shall be reduced by all legal, accounting and investment banking
fees relating to the Merger, including any contingent fee payments,
not previously expensed or accrued for as of the Closing Date. At May
31, 1998, the stockholders' equity of First Financial was $7,674,000.
STOCK OPTIONS. At the Effective Time each holder of a Stock
Option (regardless of whether or not exercisable at the Effective
Time) will receive a cash payment equal to the product of (i) the
number of shares of First Financial Common Stock subject to such Stock
15
<PAGE>
Option and (ii) the amount, if any, by which the Merger Price exceeds
the exercise price per share of such Stock Option, net of any cash
that must be withheld under federal and state income and employment
tax requirements. After receipt of such cash payment by holders of
Stock Options, such Stock Options will be no longer exercisable and
will be deemed canceled. As a condition to the receipt of such cash
payment, each option holder will be required to execute a cancellation
agreement in a form acceptable to Blackhawk. The consideration to be
received by executive officers or directors of First Financial in
connection with the termination of Stock Options pursuant to the
Merger Agreement shall hereinafter be referred to as the "Option
Consideration."
SUBSIDIARY BANK MERGER. First Financial and Blackhawk have agreed
to cooperate and to take such steps as may be necessary to obtain all
requisite regulatory, corporate and other approvals for the merger of
the Bank and Blackhawk State Bank, to be effective concurrently with
the Merger or as soon as practicable thereafter. The surviving bank
in such merger will be Blackhawk State Bank, and the Bank will be
operated as a branch of Blackhawk State Bank. The merger of the Bank
and Blackhawk State Bank is not required for the consummation of the
Merger.
BACKGROUND OF THE MERGER
Business combination activity among financial institutions has
been at a high level for several years. Some of the nation's largest
banks and thrifts have merged for many different reasons, including
the advantages of economies of scale and the ability to offer
customers a wider variety of products and services. Likewise,
community banks and thrifts, like Blackhawk and First Financial, have
consolidated for many of these same reasons, but have in addition
focused on the benefits of critical mass and entry into new geographic
markets. These strategic alliances have also become more commonplace
as competition intensifies among depository institutions, and non-
FDIC-insured financial companies have become more effective in
competing for deposit relationships, loan products and other
traditional banking products and services. From an economic
standpoint, merger premiums have risen sharply in recent years, which
has put increasing pressure on stockholder-owned financial
institutions to either take advantage of these rising premiums before
they possibly abate or improve the institution's financial performance
in order to justify remaining independent.
The Bank converted from a mutually chartered savings and loan
association to a capital stock savings bank in October 1993,
simultaneously formed First Financial as its unitary savings and loan
holding company and offered shares of First Financial common stock in
a public offering to the Bank's customers and members of the
community. Since then, the First Financial Board has periodically
reviewed the company's strategic alternatives in light of the changing
competitive conditions in the financial services industry and has
considered steps to improve First Financial's long-term competitive
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position and profitability. A direct result of this review led First
Financial to restructure its balance sheet in 1996 and 1997 by selling
certain low yielding investment securities and fixed rate long term
mortgage loans and investing the proceeds in higher yielding assets
and short term securities. The losses associated with the sales of
the low yielding securities and long term mortgage loans, among other
factors, contributed to First Financial's net loss of $158,000 in 1996
and reduced earnings of $124,000 in 1997. A $417,000 one-time charge
for FDIC insurance premiums to recapitalize the Savings Association
Insurance Fund also contributed significantly to the 1996 loss. But
the balance sheet restructuring was only one step toward improving
First Financial's long-term earnings prospects.
Following the 1995 death of First Financial's President, Chief
Executive Officer and Chairman of the Board, David L. Beasley, the
composition of First Financial's Board of Directors changed
significantly, including the addition of new Directors in 1996 and
1997. Today, only one member of the current Board of Directors served
as a Director prior to Mr. Beasley's death. The Board of Directors
believes that these changes have enhanced the organization's
management capabilities. In addition to these management changes, in
early 1998, the Bank opened a new full-service branch office in
Rockford, Illinois to complement the Bank's other two full-service
offices in Belvidere, Illinois and to increase its market coverage.
In addition to these internal operational changes, the Board
considered from time to time the advantages of combining with another
financial institution. Indeed, since the conversion, First Financial
has been approached periodically by individuals and financial
institutions interested in either acquiring First Financial or buying
a significant or controlling interest in the company.
Notwithstanding the strategic steps First Financial undertook
since the conversion to improve its financial performance, the Board
of Directors came under criticism for poor operating performance by
several significant stockholders in 1997, two of whom, Douglas M.
Kratz and his business partner, Perry B. Hansen, each purchased 20,000
shares of First Financial common stock in the open market on June 5,
1997. Together, Messrs. Kratz and Hansen's purchase represented 9.6%
of First Financial's outstanding shares. Mr. Kratz is the Chairman of
the Board and Chief Executive Officer of Financial Services
Corporation of the Midwest, a one bank holding company that owns the
Rock Island Bank, National Association, Rock Island, Illinois. Mr.
Hansen is the President of Financial Services Corporation of the
Midwest. They subsequently jointly filed a Schedule 13D to report
their ownership of more then 5% of First Financial's outstanding
shares of common stock.
Their Schedule 13D stated that they had purchased the shares for
investment purposes and did not have any current plans or proposals
that relate to, or would result in, among other events, the
acquisition of additional securities of First Financial or any
extraordinary corporate transactions affecting First Financial. By
letter dated June 9, 1997 addressed to the Board of Directors of First
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Financial, Messrs. Kratz and Hansen identified certain concerns
regarding First Financial, including the Bank's proposal to open the
new facility in Rockford, Illinois, First Financial's policies
regarding executive and director compensation and First Financial's
overall management of overhead. As reported in the Schedule 13D, the
purpose of their letter was to identify their concerns, to invite
discussions with First Financial regarding the issues and to work
closely with the Board of Directors and management to maximize
stockholder value.
Several members of the Board of Directors met with Messrs. Kratz
and Hansen to discuss their concerns. In response to the
stockholders' criticisms, the Board determined to seek financial
advice from an organization experienced in advising financial
institutions concerning strategic options. In that regard, in August
1997, the Board of Directors met with representatives of Howe Barnes
Investments, Inc., a broker-dealer firm that had been making a market
in First Financial's stock, to discuss the firm's market making
activities in First Financial's stock and to seek the firm's advice
with respect to First Financial's long-term strategic alternatives.
A few weeks after the presentation by Howe Barnes, First
Financial was approached by an out-of-state financial institution
expressing interest in a business combination with First Financial.
Nancy Sylvester, Chairman of the Board of First Financial, another
director of First Financial and Steve Derr, First Financial's
President and Chief Executive Officer, met with representatives of the
out-of-state company on September 3, 1997 to discuss its overture.
The presentation focused on the out-of-state company's operations and
its interest in the Belvidere market; the company did not express a
price it would be willing to pay to acquire First Financial. Several
weeks thereafter, First Financial was contacted by a second financial
institution. This time it was a local banking organization, which
also expressed an interest in discussing a possible business
combination with First Financial. The same representatives of First
Financial that had met with the out-of-state organization met with the
representatives of the local company on September 9, 1997 to discuss
its interest in a transaction. Notwithstanding its preliminary
indications of interest, during the meeting the local organization did
not express a meaningful desire to affiliate with First Financial and,
moreover, did not at that time propose any amount of merger
consideration it would be willing to offer First Financial in
connection with a business combination between the companies. At
First Financial's Board of Directors meeting on September 18, 1997,
the two directors and Mr. Derr updated the full Board regarding the
substance of their meetings with the two potential acquirors, and the
Board discussed First Financial's strategic options in light of these
two overtures.
About this same time, Mr. Derr was contacted by Richard Ohlinger,
President of Rochelle Savings Bank, a thrift that had been acquired by
Blackhawk in April 1997. Mr. Ohlinger and Mr. Derr had known each
other for a long-time, having both worked in the savings and loan
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industry in northern Illinois for many years. Rochelle Savings was
considering changing data processing vendors and knew that the Bank
had just changed vendors itself, so he wanted to discuss the possible
change and learn about the Bank's experience in that regard. So Mr.
Ohlinger and Dennis Conerton, President and Chief Executive Officer of
Blackhawk, met with Mr. Derr on September 26, 1997 to discuss data
processing vendors. Other topics came up during the meeting, and at
one point Mr. Conerton indicated that if First Financial was ever
interested in combining with another financial institution that it
should contact Blackhawk because his organization would be interested
in discussing that possibility.
Then sometime in October 1997, Messrs. Kratz and Perry expressed
to First Financial's Board of Directors their interest in becoming
directors. Later that month, Mr. Kratz met with members of the Board
to discuss the possibility of his joining the Board. At a special
meeting of the Board held on November 6, 1997, the Board of Directors
appointed Mr. Kratz as a Director to fill the unexpired term through
April 1998 of Jack R. Manley, a Director who had resigned on June 29,
1997. The Board of Directors appointed Mr. Kratz because it believed
that his business and banking experience would be an asset to the
organization and he had demonstrated a significant commitment to First
Financial through his stock ownership.
At the November 6 meeting, the Board also determined to invite
the President and Chief Executive Officer of the out-of-state
financial institution to meet with the First Financial Board at a
subsequent meeting to discuss his company's business combination
proposal. That subsequent Board meeting was held on November 20,
1997, during which the out-of-state company explained its interest in
combining with First Financial, although it did not propose an amount
of merger consideration for the transaction. At the conclusion of the
meeting, First Financial and the out-of-state company agreed to stay
in touch with one another should First Financial become inclined to
affiliate with another financial institution in the future.
In light of the proposal from the out-of-state company, at a
meeting of the Board of Directors of First Financial held on December
18, 1997, the Board of Directors determined to retain Howe Barnes to
prepare a valuation of, and evaluation of strategic alternatives
available to, First Financial. Howe Barnes completed its report on
January 14, 1998. Part of the report evaluated the total
consideration a buyer would likely pay to acquire First Financial,
which analysis was based on a study of comparable business combination
transactions and discounted cash flow. At a meeting of the Board of
Directors held on January 22, 1998, Howe Barnes presented its report
to the Board of Directors.
After a full discussion of Howe Barnes's presentation at the
January 22 meeting, the Board determined that the possible sale of
First Financial was likely to be the strategic alternative that would
be in the best interest of First Financial and its stockholders. To
that end, the Board determined to retain Howe Barnes to render certain
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financial advisory and investment banking services in connection with
a possible business combination involving First Financial. Mr. Derr
reminded the Board that during his meeting with Dennis Conerton of
Blackhawk in September 1997, Mr. Conerton had expressed an interest in
discussing a possible business combination with First Financial should
First Financial consider selling. Accordingly, the Board instructed
Howe Barnes to contact Blackhawk as well as the out-of-state financial
institution, to determine their interest in pursuing a negotiated
transaction. During this process, confidentiality agreements were
entered into between First Financial and the bidders.
At a meeting of the Board of Directors of First Financial held on
January 29, 1998, Dennis Conerton and Richard Ohlinger met with the
Board to discuss Blackhawk's operating philosophy and approach toward
acquisitions. Blackhawk did not propose any amount of merger
consideration either prior to or during the January 29 meeting. After
the representatives of Blackhawk were dismissed from the meeting, the
Board of Directors of First Financial instructed Howe Barnes to pursue
proposals for a business combination from both the out-of-state
institution and Blackhawk.
To begin the process, Howe Barnes and First Financial compiled
public and non-public information regarding First Financial's business
and operations and forwarded this information to the out-of-state
institution and Blackhawk. The two bidders were asked to submit
preliminary written expressions of interest to Howe Barnes by February
27, 1998 indicating the total merger consideration each would be
willing to pay in the transaction. About this same time, the local
banking organization reinitiated contact with First Financial and
expressed an interest in continuing discussions with First Financial
regarding a possible combination. As a result, the local organization
was provided a copy of the preliminary due diligence documents. When
the two bids were received, Blackhawk had bid approximately $12.5
million in cash, while the out-of-state company had proposed total
merger consideration that was a meaningful amount less than
Blackhawk's bid to be paid in either stock, cash or a combination of
stock and cash. In response to the local organization's request, First
Financial forwarded it the same public and non-public information that
it had forwarded to the other two bidders and information about the
bid process. Before this information was provided to the local
organization, a confidentiality agreement was entered into.
On March 3, 1998, the Board of Directors met to consider the
expression of interest letters that had been submitted by the out-of-
state organization and Blackhawk. A representative of Howe Barnes was
present at the meeting to update the Board regarding the status of the
bid process and to assist the Board in evaluating the bids. After
considering the proposals and discussing them with Howe Barnes, the
Board instructed Howe Barnes to continue discussions with Blackhawk
toward a definitive merger agreement, provided certain terms of
Blackhawk's proposal could be clarified. Blackhawk's proposal
appeared to offer the First Financial stockholders the highest value.
Nancy Sylvester and Douglas Kratz, two non-employee directors of the
Board of Directors, were authorized by the Board to negotiate the
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terms of the definitive Merger Agreement on behalf of First Financial.
Blackhawk also was permitted to conduct its due diligence review on
March 10 and 11, 1998, which included a review of First Financial's
books and records, facilities, and meetings with key employees. The
Board also instructed Howe Barnes to delay, if possible, terminating
discussions with the out-of-state institution until it became clear
that a transaction would likely evolve with Blackhawk. Shortly after
the March 3 Board meeting, the local banking organization notified
First Financial that it did not intend to submit a bid because it was
unwilling to compete with the level of merger consideration that had
been proposed by the other two bidders and had not been invited to
participate earlier in the bid process.
The Board of Directors of First Financial met again on March 19,
1998. That meeting was attended by a representative of Schiff Hardin
& Waite, First Financial's special legal counsel ("First Financial's
Counsel"), who reviewed with the Board the legal considerations
attendant to selling the company. A representative of Howe Barnes
also participated in the meeting. The Board reviewed a revised
expression of interest letter submitted by Blackhawk, which attempted
to clarify points raised at the March 3 meeting. After reviewing the
letter with First Financial's Counsel and a representative of Howe
Barnes, the Board determined it wanted further clarification of
certain terms in the Blackhawk letter and would be willing to proceed
with Blackhawk toward a definitive merger agreement if those terms
could be clarified. In response to First Financial's request,
Blackhawk submitted a revised expression of interest letter on March
26, 1998 clarifying its earlier letter, which First Financial found
acceptable. Since the date of Blackhawk's original expression of
interest and based on further negotiations, Blackhawk had increased
its offer to $12.7 million. Between March 26 and May 5, First
Financial and Blackhawk negotiated the terms of the definitive Merger
Agreement.
The Board of Directors of First Financial met on May 5, 1998 to
consider the Merger Agreement. Prior to the meeting, copies of the
proposed Merger Agreement had been made available to the directors. A
representative of First Financial's Counsel and Howe Barnes was
present during the meeting. Howe Barnes provided a financial analysis
of the offer and expressed its verbal opinion (subsequently confirmed
in writing) to the effect that, as of such date, the merger
consideration was fair, from a financial point of view, to the holders
of First Financial common stock (see "The Merger -- Opinion of
Financial Adviser"). First Financial's Counsel also reviewed with the
First Financial Board the draft of the Merger Agreement and discussed
with the Board its fiduciary duties in considering the Merger
Agreement. The Board asked questions of Mr. Derr, Ms. Sylvester, Mr.
Keith Hill, First Financial's Chief Financial Officer, First
Financial's Counsel and Howe Barnes regarding the Merger Agreement.
Following discussions on the proposed Merger Agreement and the related
transactions thereto, the opinion of Howe Barnes and numerous other
factors (described below in "The Merger -- Reasons for the Merger;
Recommendation of the First Financial Board"), the First Financial
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Board authorized and approved the Merger Agreement and the
transactions contemplated thereby, determined that the Merger
Agreement be submitted to a vote of the First Financial stockholders
and authorized Mr. Derr to execute the Merger Agreement, subject to
satisfactory resolution of final contract terms. The Merger Agreement
was executed in the afternoon of May 7, 1998, and the Merger was
publicly announced through a joint press release later that day. Howe
Barnes subsequently delivered its written fairness opinion that as of
May 7, 1998, the merger consideration was fair, from a financial point
of view, to the holders of the First Financial common stock.
REASONS FOR THE MERGER; RECOMMENDATION OF THE FIRST FINANCIAL BOARD
REASONS FOR THE MERGER -- FIRST FINANCIAL
In its deliberations concerning the Merger, the Board of
Directors of First Financial considered the following factors as the
primary reasons for approving the Merger Agreement: (i) the prospects
for enhancing stockholder value using strategic alternatives other
than a sale of First Financial (as those alternatives were presented
to the Board by Howe Barnes on January 22, 1998), (ii) the financial
condition, earnings and business prospects of First Financial and the
Bank, (iii) the expression of interest received from the out-of-state
financial institution and the local banking organization's
determination not to submit at bid to acquire First Financial
expressing that the pricing level was too high, (iv) the amounts paid
in recent acquisitions for thrift holding companies approximately the
size of First Financial and (v) the opinion of Howe Barnes that the
consideration to be received by the stockholders of First Financial is
fair to them from a financial point of view. See "--Opinion of
Financial Adviser."
The foregoing discussion of the information and factors
considered by the First Financial Board is not intended to be
exhaustive, but is believed to include all material factors considered
by the First Financial Board. Throughout its deliberations, the First
Financial Board received the advice of its outside legal counsel.
After deliberating with respect to the Merger and the other
transactions contemplated by the Merger Agreement, considering, among
other things, the information and factors described above (including
reliance on the opinion of Howe Barnes), the First Financial Board
concluded that the Merger is fair to, and in the best interest of, the
First Financial stockholders. In reaching this conclusion, the First
Financial Board did not assign relative or specific weights to the
above information and factors or determine that any information or
factor was of particular importance. A determination of various
weighting would, in the view of the First Financial Board, be
impractical. Rather, the First Financial Board viewed its position
and recommendations as being based on the totality of the information
and factors presented to and considered by it. In addition,
individual members of the First Financial Board may have given
different weight to different information and factors.
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FOR THE REASONS SET FORTH ABOVE, THE FIRST FINANCIAL BOARD HAS
DETERMINED THAT THE TERMS OF THE MERGER ARE FAIR TO, AND IN THE BEST
INTERESTS OF, FIRST FINANCIAL STOCKHOLDERS. ACCORDINGLY, THE FIRST
FINANCIAL BOARD RECOMMENDS THAT STOCKHOLDERS OF FIRST FINANCIAL VOTE
FOR APPROVAL OF THE MERGER AGREEMENT.
REASONS FOR THE MERGER -- BLACKHAWK
In February of 1998, management of Blackhawk executed a
confidentiality agreement with Howe Barnes, which had approached
Blackhawk, pursuant to which Blackhawk received certain information
about First Financial. After an initial review of the information,
the Board of Directors of Blackhawk authorized Blackhawk's management
to deliver an expression of interest to Howe Barnes as the financial
adviser to First Financial. After additional communication between
representatives of Blackhawk and Howe Barnes, representatives of
Blackhawk were permitted to perform a due diligence investigation of
First Financial. Subsequent to delivering an amended expression of
interest letter to First Financial on March 19, 1998, regarding the
proposed Merger, Blackhawk and First Financial completed negotiations
for the Merger Agreement.
On March 18, 1998, Blackhawk's Board of Directors met to consider
the proposed Merger. This meeting included a presentation by
management of Blackhawk with summaries of financial and valuation
analyses, the terms of the proposed acquisition as set forth in the
Merger Agreement and the due diligence findings of Blackhawk's
management.
The Board of Directors of Blackhawk concluded that the Merger
would be in the best interests of Blackhawk and its shareholders. The
Board of Directors of Blackhawk considered numerous factors in
approving the terms of the Merger. These factors included information
concerning the financial condition, results of operations, and
prospects of Blackhawk and First Financial; the capital adequacy of
the resulting entity; and the composition of the businesses of the two
organizations in the rapidly changing banking and financial services
industry.
The Board of Directors of Blackhawk believes that combining with
First Financial, which has established banking operations in
Belvidere, Illinois, is a natural and desirable extension of
Blackhawk's market area. The Board of Directors of Blackhawk also
believes that the consolidation of resources by reason of the Merger
will enable the resulting organization to provide a wider and improved
array of financial services to customers and to achieve added
flexibility in dealing with the changing competitive environment in
the financial services industry.
At the conclusion of the meeting on March 18, 1998, the Board of
Directors of Blackhawk authorized Blackhawk's management to proceed to
negotiate the Merger Agreement with First Financial. The Merger
Agreement was executed on May 7, 1998.
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OPINION OF FINANCIAL ADVISOR
At the meeting of the Board of Directors of First Financial on
May 5, 1998, at which the terms of the proposed Merger were discussed
and considered, Howe Barnes rendered a verbal opinion to First
Financial's Board of Directors that, as of the date of such opinion,
the Merger Price was fair, from a financial point of view, to the
holders of First Financial Common Stock. Howe Barnes subsequently
updated its verbal opinion by rendering a written opinion on May 7,
1998 that, as of the date of such opinion and based upon the matters
set forth in such opinion, the Merger Price was fair, from a financial
point of view, to the holders of First Financial Common Stock. Howe
Barnes has confirmed its May 7, 1998 opinion by delivery of an updated
written opinion to the Board of Directors dated the date of this Proxy
Statement stating that, as of the date hereof and based on the matters
set forth in such opinion, the Merger Price is fair, from a financial
point of view, to the holders of First Financial Common Stock.
THE FULL TEXT OF HOWE BARNES'S OPINION DATED THE DATE HEREOF,
WHICH SETS FORTH ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS
CONSIDERED, AND LIMITS ON THE REVIEW UNDERTAKEN BY HOWE BARNES, IS
ATTACHED AS APPENDIX B AND IS INCORPORATED HEREIN BY REFERENCE. THE
DESCRIPTION OF THE HOWE BARNES OPINION SET FORTH IN THIS PROXY
STATEMENT IS QUALIFIED IN ITS ENTIRELY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION. FIRST FINANCIAL STOCKHOLDERS ARE URGED TO READ THE
HOWE BARNES OPINION IN ITS ENTIRETY.
Howe Barnes's opinion as expressed herein is limited to the
fairness, from a financial point of view, of the Merger Price to the
holders of First Financial Common Stock and does not address First
Financial's underlying business decision to proceed with the Merger.
The opinion is directed only to the Merger Price in the Merger and
does not constitute a recommendation to any holder of First Financial
Common Stock as to how such holder should vote with respect to the
Merger Agreement at any meeting of holders of First Financial Common
Stock.
Howe Barnes, as part of its investment banking business, is
regularly engaged in the valuation of banks and bank holding
companies, thrifts and thrift holding companies, and various other
financial services companies, in connection with mergers and
acquisitions, initial and secondary offerings of securities, and
valuations for other purposes. The First Financial Board of Directors
selected Howe Barnes on the basis of its familiarity with the
financial services industry, its qualifications, ability, previous
experience, and its reputation with respect to such matters.
For purposes of its opinion dated the date hereof and in
connection with its review of the proposed transaction with Blackhawk,
Howe Barnes, among other things: (i) participated in discussions with
representatives of First Financial concerning First Financial's
financial condition, businesses, assets, earnings, prospects, and such
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senior management's views as to its future financial performance; (ii)
reviewed the terms of the Merger Agreement; (iii) reviewed this Proxy
Statement; (iv) reviewed certain publicly available financial
statements, both audited (where available) and unaudited, and related
financial information of First Financial and Blackhawk, including
those included in their respective Annual Reports on Form 10-KSB for
the past three years ended December 31, 1997 and the respective
Quarterly Reports on Form 10-QSB for the periods ended March 31, 1998,
September 30, 1997, and June 30, 1997, and March 31, 1997 as well as
other internally generated reports relating to asset/liability
management, asset quality, and so forth; (v) reviewed certain
financial forecasts and projections of First Financial prepared by its
management; (vi) discussed and reviewed certain aspects of the past
and current business operations, financial condition, and future
prospects of First Financial with certain members of management; (vii)
reviewed reported market prices and historical trading activity of
First Financial Common Stock; (viii) reviewed certain aspects of the
financial performance of First Financial and compared such financial
performance with similar data available for certain other financial
institutions and certain of their publicly traded securities; and (ix)
reviewed certain of the financial terms, to the extent publicly
available, of certain recent business combinations involving other
financial institutions.
In conducting its review and rendering its opinions Howe Barnes
assumed and relied, without independent verification, upon the
accuracy and completeness of all of the financial and other
information that has been provided to Howe Barnes by First Financial,
Blackhawk, and their respective representatives, and of the publicly
available information that was reviewed by Howe Barnes. Howe Barnes
is not an expert in the evaluation of allowances for loan losses and
has not independently verified such allowances, and has relied on and
assumed that the aggregate allowances for loan losses set forth in the
balance sheets of each of First Financial and Blackhawk at December
31, 1997 are adequate to cover such losses and complied fully with
applicable law, regulatory policy, and sound banking practice as of
the date of such financial statements. Howe Barnes was not retained
to and did not conduct a physical inspection of any of the properties
or facilities of First Financial or Blackhawk, did not make any
independent evaluation or appraisal of the assets, liabilities or
prospects of First Financial or Blackhawk, was not furnished with any
such evaluation or appraisal, and did not review any individual credit
files. Howe Barnes's opinion is necessarily based on economic,
market, and other conditions as in effect on, and the information made
available to us as of, the date hereof.
The following is a brief summary of the analyses performed by
Howe Barnes in connection with Howe Barnes' written opinion, dated
July 23, 1998.
STOCK TRADING HISTORY. Howe Barnes examined the history of
trading prices and volume for First Financial Common Stock and the
relationship between the movements of such trading prices to movements
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of the Nasdaq Bank Index, other financial indices, and of the trading
prices of the common stocks of the companies in the First Financial
Peer Group consisting of 33 publicly-traded Midwest savings
institutions with total assets between $75 and $125 million. The
companies in the First Financial Peer Group are similar in size to
First Financial, and operate in an economic, geographic, and
demographic environment that Howe Barnes deemed to be similar to the
environment in which First Financial operates. Comparative financial
statistics were reviewed and particular attention was given to the
one-year period leading up to the date of the fairness opinion.
COMPARABLE COMPANY ANALYSIS. Howe Barnes calculated, reviewed,
and compared selected publicly-available financial data and ratios (at
or for the twelve months ended March 31, 1998) and trading multiples
(as of July 15, 1998) for First Financial to the corresponding ratios
and multiples of the First Financial Peer Group. The trading
multiples used in comparing First Financial to the First Financial
Peer Group were market price as a multiple of: (i) book value (which
was 1.43x for First Financial as compared to a mean of 1.23x for the
First Financial Peer Group) and (ii) earnings per share ("EPS") for
the twelve months ended March 31, 1998 (which was 48.2x for First
Financial compared to a mean of 21.9x for the First Financial Peer
Group). Howe Barnes used earnings estimates as published by the
Institutional Brokers Estimate System ("IBES"), where available, for
the companies comprising the First Financial Peer Group. IBES is a
data service which monitors and publishes a compilation of earnings
estimates produced by selected research analysts on companies of
interest to investors. Where IBES estimates were not available, Howe
Barnes used consensus earnings estimate from alternate publicly-
recognized earnings estimate services.
COMPARABLE TRANSACTION ANALYSIS. As part of its analyses, Howe
Barnes reviewed 34 completed or pending comparable mergers and
acquisitions of savings institutions headquartered throughout the
United States announced from April 25, 1997 to July 15, 1998 in which
total assets of the acquired company were in the approximate range of
$150 million or less ("Comparable Transactions"). For each
transaction for which data was available, Howe Barnes calculated the
multiple of the offer value to the acquired company's: (i) EPS for
the twelve months preceding ("LTM"); (ii) book value per share; and
(iii) premium to core deposits.
The calculations for the Comparable Transactions yielded a range
of multiples of offer value to LTM EPS of 13.0x to 439.4x, with a mean
of 31.1x and a median of 23.3x; a range of multiples of offer value to
book value of 1.07x to 2.20x, with a mean of 1.60x and a median of
1.61x; and a range of percentages of offer value premium to core
deposits of 1.8% to 21.2%, with a mean of 9.7% and a median of 8.6%.
Howe Barnes compared these multiples with the corresponding
multiples for the Merger, valuing the Merger Price at $12.6 million or
$30.00 per share. In calculating the multiples for the Merger, Howe
Barnes used First Financial's EPS for the twelve months ended March
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31, 1998, and book value per share and core deposits as of March 31,
1998. Howe Barnes calculated that the Merger Price represented
multiples of 286.3x First Financial's LTM EPS, 29.4x adjusted core
earnings, 1.63x its book value per share, and a core deposit premium
of 8.4%. Howe Barnes also compared the transaction multiples to the
merger price floor of $29.00 per share. In order for the merger price
floor to be in effect, First Financial would have to generate a year-
to-date net loss resulting in a lower equity base and corresponding
book value. As a result, the floor merger price would compare even
more favorably to the comparable transactions.
No company or transaction used in the above analyses as a
comparison is identical to First Financial or the Merger.
Accordingly, an analysis of the results of the foregoing is not
mathematical; rather, it involves complex considerations and judgments
concerning differences in financial operating characteristics,
including, among other things, differences in revenue composition and
earnings performance among the companies, and other facts that could
affect the public trading value of the companies to which they are
being compared.
DISCOUNTED CASH FLOW ANALYSIS. Using discounted cash flow
analysis, Howe Barnes estimated the future dividend streams that First
Financial could produce over the period from January 1, 1998 through
December 31, 2002, assuming annual asset growth rates ranges between
3.0% and 5.0%; and further assumed First Financial performed in
accordance with recent historical trends and the future outlook of
First Financial management. Howe Barnes calculated terminal values as
a perpetuity with an asset growth rate of 3.0%. The dividend streams
and terminal value were discounted to present values as of December
31, 1997, using discount rates ranging from 10.0% to 12.0%, which
reflect different assumptions regarding the required rates of return
to holders and prospective buyers of First Financial Common Stock.
Howe Barnes estimated a range of terminal values by applying multiples
ranging from 17 times to 19 times estimated year-end 2002 net income.
The range of terminal multiples was chosen based on past and current
trading multiples of institutions similar to First Financial and past
and current multiples of comparable merger and acquisition
transactions. The range of present values of First Financial
resulting from this analysis was $10.9 million to $12.7 million.
In connection with its written opinion dated as of the date of
this Proxy Statement, Howe Barnes performed procedures to update
certain of its analyses and reviewed the assumptions on which such
analyses were based and the factors considered in connection
therewith. In updating its opinion, Howe Barnes did not utilize any
methods of analysis in addition to those described.
The foregoing is a summary of the material financial analyses
performed by Howe Barnes and presented to the First Financial Board of
Directors, but does not purport to be a complete description of the
analyses performed by Howe Barnes. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to
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<PAGE>
partial analysis or summary description. Furthermore, in arriving at
its opinion, Howe Barnes did not attribute any particular weight to
any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and
factor. Selecting portions of the analyses or of the summary set
forth above, without considering the analyses as a whole, could create
an incomplete view of the processes underlying Howe Barnes' opinion.
The ranges of valuations resulting from any particular analysis
described above should not be taken to be Howe Barnes' view of the
actual value of First Financial.
In performing its analyses, Howe Barnes made numerous assumptions
with respect to industry performance, business and economic conditions
and other matters, many of which are beyond the control of First
Financial and Blackhawk. The analyses performed by Howe Barnes are
not necessarily indicative of actual values of future results, which
may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as part of Howe Barnes'
analysis of the fairness of the Merger Price, from a financial point
of view, to the holders of First Financial Common Stock. The analyses
do not purport to be appraisals or to reflect the prices at which a
company or its securities may actually be bought or sold.
Pursuant to the terms of a letter agreement dated February 7,
1998, First Financial agreed to pay Howe Barnes for its services in
connection with the Merger, including the rendering of its opinion.
First Financial has paid Howe Barnes $50,000 for its Board of
Directors presentation and written opinion rendered May 7, 1998.
Pursuant to its engagement of Howe Barnes, First Financial agreed to
pay Howe Barnes a cash fee of approximately $50,000 payable on the
Closing Date, for advisory services rendered in connection with
reaching the Merger Agreement. In the ordinary course of business
Howe Barnes acts as a market maker, buying and selling the common
stock of First Financial for its own account and for the accounts of
customers. In addition, First Financial agreed to indemnify Howe
Barnes against certain liabilities arising out of its engagement,
including liabilities under the federal securities laws.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of First Financial's management, the Bank's
management and the Board of Directors of the Bank and the First
Financial Board may be deemed to have interests in the Merger in
addition to their interests, if any, as holders of First Financial
Common Stock. The First Financial Board was aware of these factors
and considered them, among other matters, in approving the Merger
Agreement and the transactions contemplated thereby.
INDEMNIFICATION. Blackhawk has agreed, from and after the
Effective Time (defined below), to indemnify and hold harmless each
present and former director and officer of First Financial and the
Bank against any costs or expenses (including reasonable attorneys'
fees), judgments, fines, losses, claims, damages or liabilities
incurred in connection with any claim, action, suit, proceeding, or
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<PAGE>
investigation, whether civil, administrative or investigative, arising
out of matters existing or occurring at or prior to the Effective
Time, whether asserted or claimed prior to, at, or after the Effective
Time, to the full extent permitted under applicable law (and Blackhawk
has agreed to advance expenses as incurred to the full extent
permitted under applicable law, provided that the person to whom
expenses are advanced provides an undertaking to repay such advances
if it is ultimately determined that such person is not entitled to
indemnification). Blackhawk will cause to be maintained a directors'
and officers' liability insurance policy, which will be in effect for
a period of three years after the Effective Time and will cover
present and former directors and officers of First Financial and the
Bank for matters existing or occurring prior to, at or after the
Effective Time.
EMPLOYEE BENEFIT PLANS. At the Effective Time, each person who
remains as an employee of First Financial and its subsidiaries shall
remain eligible for the employee welfare plans and other fringe
benefit programs currently maintained by First Financial and its
subsidiaries; provided that Blackhawk may, in its discretion and after
December 31, 1998, in lieu of continuing the First Financial welfare
plans substitute employee welfare plans and other fringe benefit
programs offered or maintained by Blackhawk and its subsidiaries on
terms and conditions substantially similar in the aggregate to those
that Blackhawk and its subsidiaries may make available to similarly
situated officers and employees, including, without limitation, any
health, life, long-term disability, severance, vacation or paid time
off programs (the "Blackhawk Welfare Plans"). The period of
employment and compensation of each employee of First Financial and
its subsidiaries with First Financial and its subsidiaries shall be
counted for all purposes (except for purposes of benefit accrual)
under Blackhawk's Welfare Plans, including, without limitation, for
purposes of service credit and eligibility. Any expenses incurred by
an employee of First Financial or its subsidiaries under First
Financial's or the Bank's employee welfare benefit plans (such as
deductibles or co-payments), shall be counted for all purposes under
the Blackhawk Welfare Plans. Blackhawk shall waive any pre-existing
condition exclusions for conditions existing on the Closing Date, and
actively-at-work requirements for periods ending on the Closing Date
contained in Blackhawk's Welfare Plans as they apply to the employees
of First Financial and its subsidiaries and former employees and
dependents.
SEVERANCE, EMPLOYMENT AND SUPPLEMENTAL AGREEMENTS. Blackhawk has
agreed that it will perform and satisfy the terms of (a) the
employment agreement by and among First Financial, the Bank and Steven
C. Derr, (b) the severance agreements by and among First Financial,
the Bank and each of Steven C. Derr, Keith D. Hill, Robert W. Opperman
and Donald J. Kucera, respectively, (c) the supplemental executive
agreements relating to "gross up" for any excess parachute amounts
under Section 280G of the Code by and among First Financial, the Bank
and Messrs. Derr and Hill, and (d) the executive salary continuation
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<PAGE>
agreement by and between the Bank and David L. Beasley, all as in
effect on the date of the Merger Agreement.
The employment agreement of Mr. Derr provides, among other
things, that in the event of Mr. Derr's resignation within one year
following a change in control or his dismissal following a change of
control, Mr. Derr shall be entitled to the greater of (i) a lump sum
payment equal to the product of 2.99 times his average base salary,
including bonuses and other cash compensation, for the previous five
years or (ii) the payments to which he is entitled during the
remaining term of his employment agreement.
The severance agreement of Mr. Derr provides, among other
things, that if a change in control occurs, followed by the voluntary
or involuntary termination of Mr. Derr's employment other than for
cause on or before December 31, 2000, Mr. Derr's severance pay will be
determined as follows: (i) in the event of involuntary termination,
Mr. Derr will be entitled to a sum equal to two (2) times his Annual
Compensation (defined below); (ii) in the event of voluntary
termination following a loss of significant authority, reduction in
Annual Compensation or benefits, or certain relocation, Mr. Derr will
be entitled to a sum equal to two (2) times his Annual Compensation;
(iii) in the event that Mr. Derr does not accept a substantially
comparable position offered by the Bank following a change in control,
he will be entitled to a sum equal to one (1) times his Annual
Compensation; (iv) in the event that Mr. Derr accepts a substantially
comparable position with the Bank after a change in control and then
voluntarily terminates his employment prior to December 31, 2000, he
will be entitled to a sum equal to his Annual Compensation reduced by
one-half of the wages, salary, bonus and incentive compensation paid
to him following the change in control. Payment under (ii)-(iv) above
shall cease if Mr. Derr voluntarily terminates employment and
subsequently becomes employed at a financial institution or branch of
a financial institution within fifty (50) miles of the current main
office of the Bank. Upon the occurrence of a change in control
followed by the voluntary or involuntary termination of Mr. Derr's
employment prior to December 31, 2000, the Bank shall cause to be
continued for six (6) months life, medical, dental and disability
coverage substantially identical to Mr. Derr's coverage prior to his
severance.
Mr. Derr has also entered into a supplemental executive
agreement, whereby the Bank would (i) provide Mr. Derr with any
benefits he would be entitled to but would lose under his employment
or severance agreement because such benefits would be considered
"excess parachute payments" under Section 280G of the Internal Revenue
Code (the "Code"), (ii) pay any excise taxes that Mr. Derr would be
subject to as a result of receiving benefits under his employment or
severance agreement that would be considered "excess parachute
payments," and (iii) pay any taxes that Mr. Derr would be subject to
as a result of receiving benefits under his supplemental executive
agreement.
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<PAGE>
If, following a change of control, termination of Mr. Derr's
employment occurs on or before September 20, 1999, Mr. Derr will be
entitled to the greater of the payments to which he is entitled under
his employment agreement or under his severance agreement. If,
following a change of control, termination of Mr. Derr's employment
occurs between September 21, 1999 and December 31, 2000, he will be
entitled to the payments under his severance agreement only. If,
following a change of control, termination of Mr. Derr's employment
occurs after December 31, 2000, he will not be entitled to any
payments.
The severance agreement of Mr. Hill provides, among other things,
that if a change in control occurs, followed by the voluntary or
involuntary termination of Mr. Hill's employment other than for cause
prior to December 31, 2000, Mr. Hill's severance pay will be
determined as follows: (i) in the event of involuntary termination,
Mr. Hill will be entitled to a sum equal to two (2) times his Annual
Compensation; (ii) in the event of voluntary termination following a
loss of significant authority, reduction in Annual Compensation or
benefits, or certain relocation, Mr. Hill will be entitled to a sum
equal to two (2) times his Annual Compensation; (iii) in the event
that Mr. Hill does not accept a substantially comparable position
offered by the Bank following a change in control, he will be entitled
to a sum equal to his Annual Compensation; (iv) in the event that Mr.
Hill accepts a substantially comparable position after a change in
control and then voluntarily terminates his employment prior to
December 31, 2000, he will be entitled to a sum equal to one (1) times
his Annual Compensation reduced by one-half of the wages, salary,
bonus and incentive compensation paid to him following the change in
control. Payment under (ii)-(iv) above shall cease if Mr. Hill
voluntarily terminates employment and subsequently becomes employed at
a financial institution or branch of a financial institution within
fifty (50) miles of the current main office of the Bank. Upon the
occurrence of a change in control followed by the voluntary or
involuntary termination of Mr. Hill's employment prior to December 31,
2000, the Bank shall cause to be continued for six (6) months life,
medical, dental and disability coverage substantially identical to Mr.
Hill's coverage prior to his severance.
Mr. Hill has also entered into a supplemental executive
agreement, whereby the Bank would (i) provide Mr. Hill with any
benefits he would be entitled to but would lose under his severance
agreement because such benefits would be considered "excess parachute
payments" under Section 280G of the Code, and (ii) pay any excise
taxes that Mr. Hill would be subject to as a result of receiving
benefits that would be considered "excess parachute payments," and
(iii) pay any taxes that Mr. Hill would be subject to as a result of
receiving benefits under his supplemental executive agreement
The severance agreement of Mr. Opperman provides, among other
things, that if a change in control occurs, followed by the voluntary
or involuntary termination of Mr. Opperman's employment other than for
cause prior to December 31, 1998, Mr. Opperman's severance pay will be
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<PAGE>
determined as follows: (i) in the event of involuntary termination,
Mr. Opperman will be entitled to a sum equal to one (1) times his
Annual Compensation; (ii) in the event of voluntary termination
following a loss of significant authority, reduction in Annual
Compensation or benefits, or certain relocation, Mr. Opperman will be
entitled to a sum equal to one (1) times his Annual Compensation;
(iii) in the event that Mr. Opperman does not accept a substantially
comparable position with the Bank following a change in control, he
will be entitled to a sum equal to one-half (1/2) his Annual
Compensation; (iv) in the event that Mr. Opperman accepts a
substantially comparable position after a change in control and then
voluntarily terminates his employment prior to December 31, 1998, he
will be entitled to a sum equal to one-half his Annual Compensation
reduced by one-half of the wages, salary, bonus and incentive
compensation paid to him following the change in control. Payment
under (ii)-(iv) above shall cease if Mr. Opperman voluntarily
terminates employment and subsequently becomes employed at a financial
institution or branch of a financial institution within fifty (50)
miles of the current main office of the Bank. Upon the occurrence of a
change in control followed by the voluntary or involuntary termination
of Mr. Opperman's employment prior to December 31, 1998, the Bank
shall cause to be continued for six (6) months life, medical, dental
and disability coverage substantially identical to Mr. Opperman's
coverage prior to his severance.
The severance agreement of Mr. Kucera provides, among other
things, that if a change in control occurs, followed by the voluntary
or involuntary termination of Mr. Kucera's employment other than for
cause prior to December 31, 1999, Mr. Kucera's severance pay will be
determined as follows: (i) in the event of involuntary termination,
Mr. Kucera will be entitled to a sum equal to one and one-half (1-1/2)
times his Annual Compensation; (ii) in the event of voluntary
termination following a loss of significant authority, reduction in
Annual Compensation or benefits, or certain relocation, Mr. Kucera
will be entitled to a sum equal to one and one-half (1-1/2) times his
Annual Compensation; (iii) in the event that Mr. Kucera does not
accept a substantially comparable position offered by the Bank
following a change in control, he will be entitled to a sum equal to
three-fourths (3/4) of his Annual Compensation; (iv) in the event that
Mr. Kucera accepts a substantially comparable position after a change
in control and then voluntarily terminates his employment prior to
December 31, 1999, he will be entitled to a sum equal to three-fourths
(3/4) of his Annual Compensation reduced by one-half of the wages,
salary, bonus and incentive compensation paid to him following the
change in control. Payment under (ii)-(iv) above shall cease if Mr.
Kucera voluntarily terminates employment and subsequently becomes
employed at a financial institution or branch of a financial
institution within fifty (50) miles of the current main office of the
Bank. Upon the occurrence of a change in control followed by the
voluntary or involuntary termination of Mr. Kucera's employment prior
to December 31, 1999, the Bank shall cause to be continued for six (6)
months life, medical, dental and disability coverage substantially
identical to Mr. Kucera's coverage prior to his severance.
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<PAGE>
For each of the severance agreements discussed above, "Annual
Compensation" means and includes the highest rate of monthly base
salary multiplied by twelve (12) for an Employee's service in his
position during the twelve (12) consecutive months ending immediately
before the change in control, which compensation is includable in the
gross income of the Employee for income tax purposes.
Assuming that, within twelve months of a change of control, each
of Messrs. Derr, Hill, Opperman and Kucera's employment was
involuntarily terminated, the amounts payable under the severance
agreements and employment agreement, exclusive of any unpaid
compensation through the date of termination, would be approximately
as follows: Mr. Derr $ 246,000; Mr. Hill $ 106,000; Mr. Opperman
$75,000 (prior to December 31, 1998); and Mr. Kucera $ 96,000.
Under the executive salary continuation agreement by and between
the Bank and Mr. Beasley, the Bank pays an annual benefit of $20,000
to Mr. Beasley's beneficiary until April, 2010.
SHARE OWNERSHIP. As of the Record Date, directors and executive
officers of First Financial and the Bank beneficially owned an
aggregate of 37,944 shares of First Financial Common Stock (exclusive
of shares which could be acquired upon exercise of Stock Options and
Recognition and Retention Plans shares). Assuming the Merger Price is
$30.00, these directors and executive officers will receive a total of
approximately $1,138,320 if the Merger is consummated.
STOCK OPTIONS. Certain members of the Board of Directors and
management hold Stock Options to purchase shares of First Financial
Common Stock which will be adjusted so as to entitle the holder
thereof to receive an amount in cash in lieu of the shares ("Option
Consideration"). Assuming a Merger Price of $30.00 per share, the
Option Consideration to be received by the following directors and
executive officer would be as follows:
DIRECTOR AND/OR EXECUTIVE OFFICER OPTION CONSIDERATION
--------------------------------- ---------------------
Steven C. Derr $150,546
Keith D. Hill 14,375
Donald J. Kucera 11,600
Patricia J. McCoy 11,572
Nancy Sylvester 10,150
Richard Winkelman 15,224
ACCELERATED VESTING UNDER THE RECOGNITION AND RETENTION PLANS. Pursuant
to the terms of the Merger Agreement and the Recognition and Retention
Plans, all awards of unvested First Financial Common Stock under the
Recognition and Retention Plans granted prior to the Effective Time will
be considered shares of outstanding First Financial Common Stock as of the
Effective Time and grantees will become vested in such awarded shares and
will receive the Merger Price in exchange for such awarded shares.
Assuming a Merger Price of $30.00 per share, the benefit of such
accelerated vesting of Recognition and Retention Plans awards under the
Recognition and Retention Plans for the following executive officers would
be as follows:
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<PAGE>
<TABLE>
<CAPTION>
EXECUTIVE OFFICER ACCELERATED VESTING SHARES CONSIDERATION TO BE RECEIVED
----------------- -------------------------- ----------------------------
<S> <C> <C>
Keith D. Hill 250 7500**
</TABLE>
** Does not include tax reimbursement pursuant to the Recognition and
Retention Plan applicable to Mr. Hill.
EMPLOYEE BENEFIT PLAN MATTERS
EMPLOYEE STOCK OWNERSHIP PLAN. As of the Effective Time, the
loan between First Financial and the First Federal Savings Bank of
Belvidere Employee Stock Ownership Plan (the "First Federal ESOP")
will be repaid in full with the cash consideration received from
Blackhawk for the unallocated First Financial Shares held in the First
Federal ESOP in the amount equal to the Merger Price multiplied by the
number of unallocated shares of First Financial Common Stock held by
the First Federal ESOP, and any unallocated portion of the
consideration remaining after such repayment will be allocated to the
First Federal ESOP accounts of the employees of First Financial and
its subsidiaries who are participants and beneficiaries (such
individuals hereinafter referred to as the "ESOP Participants"), in
accordance with the terms of the First Federal ESOP as amended with
respect to such termination. As soon as practicable after all assets
have been allocated, the First Federal ESOP will be terminated.
Following the receipt of a favorable determination letter from the
Internal Revenue Service ("IRS") as to the tax qualified status of the
First Federal ESOP upon its termination under Section 401(a) and
4975(e) of the Code (the "Final Determination Letter"), distributions
of the benefits under the First Federal ESOP will be made to the ESOP
Participants. Blackhawk, First Financial and their respective
representatives prior to the Effective Time, and Blackhawk and its
representatives after the Effective Time, will use their best efforts
to apply for and obtain a favorable Final Determination Letter from
the IRS. In the event that Blackhawk, First Financial and their
respective representatives, prior to the Effective Time, and Blackhawk
and its representatives after the Effective Time, reasonably determine
that the First Financial ESOP cannot obtain a favorable Final
Determination Letter, or that the amounts held therein cannot be so
applied, allocated or distributed without causing the First Federal
ESOP to lose its qualified status, First Financial prior to the
Effective Time and Blackhawk after the Effective Time will take such
action as they may reasonably determine with respect to the
distribution of benefits to the ESOP Participants, provided that the
assets of the First Federal ESOP will be held or paid for the benefit
of the ESOP Participants and provided further that in no event will
any portion of the amounts held in the First Federal ESOP revert,
directly or indirectly, to First Financial or any affiliate thereof,
or to Blackhawk or any affiliate thereof. All ESOP Participants will
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<PAGE>
fully vest and have a nonforfeitable interest in their accounts under
the First Federal ESOP determined as of the Effective Time.
PROFIT SHARING PLAN. At the Effective Time, the First Federal
Savings Bank of Belvidere Profit Sharing Plan (the "First of Belvidere
PSP") will be continued in effect. Thereafter, Blackhawk may elect to
terminate the First of Belvidere PSP or merge it with a tax-qualified
plan maintained by Blackhawk. If the plan merger occurs, or if First
Financial employees otherwise become eligible to participate in the
Blackhawk plan, each First Financial employee's period of employment
with First Financial or its subsidiaries will be counted for
eligibility and vesting purposes under the Blackhawk plan. Blackhawk
acknowledges and agrees that the Bank will make a matching
contribution to the First of Belvidere PSP prior to or on the Closing
Date in an amount equal to 3 percent of compensation earned by
participants in the First of Belvidere PSP through the Closing Date,
which amount shall be accrued for on or before the Closing Date. At
the Effective Time, all participants in the First of Belvidere PSP
shall fully vest and have a nonforfeitable interest in their accounts
under the First of Belvidere PSP determined as of the Effective Time.
If the First of Belvidere PSP is terminated, all participants shall be
offered the option of a lump-sum cash payment or, with Blackhawk's
consent, the option of rolling or transferring such amount to the
Blackhawk plan, subject in all cases to applicable provisions of the
Code.
EFFECTIVE TIME
The "Effective Time" with respect to the Merger will be upon the
close of business on the day when the certificate of merger has been
accepted for filing by the Delaware Secretary of State in accordance
with Section 251(c) of the DGCL. It is anticipated that the
certificate of merger will be filed with the Delaware Secretary of
State the last business day of the calendar month in which all of the
conditions precedent to the Merger set forth in Article V of the
Merger Agreement have occurred if such conditions shall have occurred
not later than the 15th day of such month; provided, however, that if
such conditions shall have occurred later than the 15th day of such
month, then the closing shall take place no later than the 15th day of
the next following month, unless such date is extended by mutual
agreement of the parties.
PAYMENT PROCEDURES AND PAYING AGENT
Blackhawk will designate a paying agent reasonably satisfactory
to First Financial to deliver to the stockholders of First Financial
the cash to which they are entitled pursuant to the Merger (the
"Paying Agent"). As soon as practicable after the First Financial
stockholders have approved the Merger Agreement and the respective
regulatory authorities have approved the Merger (see "--Regulatory
Approvals"), Blackhawk will cause the Paying Agent to mail to each
holder of record of shares of First Financial Common Stock a form of
letter of transmittal pursuant to which each such holder will transmit
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<PAGE>
their stock certificate(s) representing shares of First Financial
Common Stock or, in lieu thereof, such evidence of lost, stolen or
mutilated certificate or certificates and such surety bond or other
security as the Paying Agent may reasonably require. HOLDERS OF FIRST
FINANCIAL COMMON STOCK SHOULD NOT SEND IN ANY STOCK CERTIFICATES UNTIL
THEY RECEIVE THE LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM THE
PAYING AGENT. After the Effective Time, each such holder that
surrenders his or her First Financial Common Stock certificates or, in
lieu thereof, the required documentation for a lost, stolen or
mutilated certificate to the Paying Agent will, upon acceptance
thereof by the Paying Agent, be entitled to receive the Merger Price,
without interest.
The Paying Agent will accept stock certificates or, in lieu
thereof, the required documentation for a lost, stolen or mutilated
certificate upon compliance with such reasonable terms and conditions
as Blackhawk or the Paying Agent may impose to effect an orderly
exchange thereof in accordance with customary exchange practices. If
the tender of a stock certificate or, in lieu thereof, the required
documentation for a lost, stolen or mutilated certificate is not in
compliance with such reasonable terms and conditions, the Paying Agent
will promptly return such items with instructions as to how to comply
with such terms and conditions.
After the Effective Time, holders of shares of First Financial
Common Stock will cease to have rights with respect to such shares,
and the sole rights of such holders (other than holders who have
perfected appraisal rights) will be to exchange their stock
certificates for payment of the Merger Price. After the Effective
Time, there will be no further transfer on the records of First
Financial of shares of First Financial Common Stock, and if stock
certificates are presented for transfer, they will be canceled against
delivery of the Merger Price. Blackhawk will not be obligated to
deliver the Merger Price until a holder of First Financial Common
Stock surrenders his or her stock certificates or furnishes, in lieu
thereof, the required documentation for a lost, stolen or mutilated
certificate. No interest will be accrued or paid on the Merger Price.
Any holder of shares of First Financial Common Stock with respect
to which appraisal rights have been properly perfected will have the
right to receive the fair value of such shares in accordance with the
procedures described under "Appraisal Rights" and in Appendix C to
this Proxy Statement.
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement, First Financial and Blackhawk have each
made certain customary representations and warranties relating to,
among other things, the parties' respective organization and
qualification to do business, authority relative to the Merger
Agreement, reliability of financial statements, and employee benefit
plans. In addition, First Financial made certain representations and
warranties relating to its capitalization, lending activities,
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<PAGE>
properties and assets, insurance, compliance with applicable laws and
regulations, contracts, taxes, environmental matters, the timely
filing of all regulatory reports, the absence of certain legal
proceedings and other events, including material adverse changes in
First Financial's business, income, assets, liabilities, or financial
condition. For detailed information on such representations and
warranties, see Articles II and III of the Merger Agreement attached
hereto as Appendix A.
CONDUCT OF BUSINESS PENDING THE MERGER
The Merger Agreement provides that between the date of execution
of the Merger Agreement and the Effective Time, First Financial will
conduct its business in the usual and ordinary course consistent in
all material respects with prudent banking practices and use
reasonable efforts to maintain its reputation and business
relationships. In addition, First Financial has agreed not to take,
or permit the Bank to take, without the prior written consent of
Blackhawk, any of the following actions, among other items:
(a) make any changes in their respective charter or bylaws
or in the number of issued and outstanding shares, except for changes
resulting from the exercise of existing Options in accordance with
their terms;
(b) increase the compensation of their directors, officers
or employees except consistent with prior practice and not to exceed
4% in any given case, and not award or pay bonuses to directors,
officers or employees except consistent with prior practice and in any
event not to exceed $23,000 in the aggregate for all directors,
officers and employees; provided, however, that notwithstanding the
limitation in the Merger Agreement concerning paying bonuses to
directors, Blackhawk agrees that First Financial may pay a bonus on
the Closing Date in an amount up to $15,000 to its Chairman of the
Board in consideration for the services rendered by the Chairman to
First Financial in connection with the Merger and such amount will not
be counted in determining the aggregate bonuses paid to directors,
officers and employees for purposes of the $23,000 limit.
(c) make any loan for $250,000 or more (including
aggregation of loans to any one customer or related entities) except
for loans currently committed to be made pursuant to written
commitment letters, make any other loans, or renewals or restricting
of loans except in the ordinary course of business and consistent in
all material respects with prudent banking practices and policies and
applicable rules and regulations of federal or state banking agencies
with respect to amount, terms, security and quality of the borrower's
credit;
(d) declare or pay any stock dividend, cash dividend or
other distribution without the prior written consent of Blackhawk;
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<PAGE>
(e) fail to use their best efforts to maintain their
present insurance coverage in respect of their respective properties
and businesses;
(f) make any significant changes, outside the ordinary
course of business, in the general nature of the business conducted by
First Financial and the Bank, including but not limited to the
investment or use of their assets, the liabilities they incur, or the
facilities they operate;
(g) enter into any employment, consulting or other similar
agreement that is not terminable on 30 days' notice or less without
penalty or obligation (beyond the notice period of 30 days of less);
(h) take any action that would result in a termination,
partial termination, curtailment, discontinuance or merger into
another plan or trust of any First Financial benefit plan, except as
provided in the Merger Agreement;
(i) fail to timely file all required tax returns with all
applicable taxing authorities or make any application for or consent
to any extension of time for filing any tax return or any extension of
the period of limitations applicable thereto;
(j) except as already reflected in the Financial
Statements, make any expenditure for fixed assets in excess of $10,000
for any single item, or $25,000 in the aggregate, or enter into any
lease of fixed assets; provided, however, that this paragraph (j)
shall not apply to expenditures for fixed assets already contracted
for as of May 7, 1998, relating to the Bank's Rockford facility which
amounted to $41,926;
(k) incur any liabilities or obligations, make any
commitments or disbursements, acquire or dispose of any property or
asset, make any contract or agreement, or engage in any transaction,
except in the ordinary course consistent in all material respects with
prudent banking practices;
(l) purchase or invest in instruments other than those
permitted by the Bank's investment policy, including, but not limited
to, obligations of the government of the United States, agencies of
the United States or mortgage-backed securities, or execute individual
investment transactions greater than $525,000;
(m) make any changes of a material nature in its accounting
procedures, methods, policies or practices or the manner in which it
conducts its businesses and maintain its records;
(n) borrow any funds from third parties and, in turn,
invest such funds in assets other than loans that the Bank originates;
and
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(o) fail to use its best efforts to assist Blackhawk in the
sale of the "Miller & Schroeder" loans owned by either First Financial
or the Bank.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of First Financial and Blackhawk to consummate
the Merger are subject to the satisfaction, unless waived, of certain
conditions, including the following: (i) the representations and
warranties of the other party in the Merger Agreement, and in certain
other documents delivered by such party pursuant to the Merger
Agreement, shall be true and correct in all material respects on the
date of the Merger Agreement and at the Effective Time; (ii) the other
party shall have performed all agreements required by the Merger
Agreement to be performed by such party; (iii) the approval of all
appropriate regulatory entities of the Merger Agreement, upon such
terms and conditions as are satisfactory to Blackhawk in its
reasonable judgment, the expiration of all required regulatory waiting
periods and the nonexistence of a motion for rehearing or appeal from
such approval or commencement of any suit or action seeking to enjoin
the Merger or to obtain other relief in respect of the Merger; (iv) no
suit or action shall have been instituted or threatened seeking to
enjoin the consummation of the Merger, or to obtain other relief in
connection with the Merger Agreement or the Merger (including but not
limited to substantial damages), which reasonably could be expected to
result in the issuance of an order enjoining the Merger or result in a
determination that the other party has failed to comply with
applicable legal requirements of a material nature in connection with
the Merger or actions preparatory thereto; and (vii) each of First
Financial and Blackhawk shall have delivered, or caused to be
delivered, various certificates, legal opinions and other documents.
In addition, the obligations of Blackhawk to consummate the Merger are
subject to the approval of the stockholders of First Financial.
AMENDMENT
The Merger Agreement may be amended by First Financial and
Blackhawk at any time before or after approval of the Merger Agreement
by the First Financial Stockholders. However, after the Merger
Agreement has been approved by the First Financial stockholders, no
amendment may affect the rights of such stockholders in a manner that
is materially adverse to their interests.
TERMINATION AND TERMINATION FEES
The Merger Agreement may be terminated at any time prior to the
Effective Time, either before or after being approved by the First
Financial stockholders, in the following circumstances: (i) by
agreement of Blackhawk and First Financial; (ii) by either Blackhawk
or First Financial if certain regulatory approvals have not been
obtained on or before September 30, 1998; (iii) by either Blackhawk of
First Financial if the Merger is not completed by October 31, 1998;
(iv) by either Blackhawk or First Financial if any of the conditions
39
<PAGE>
precedent to the terminating party's obligations to complete the
Merger have not been fulfilled or waived; (v) by either Blackhawk or
First Financial if the other party makes a material breach or default
of any covenant or agreement in the Merger Agreement and such breach
or default is not cured within a reasonable time (not to exceed 20
days) after the terminating party gives notice specifying the alleged
default; (vi) by First Financial if its Board of Directors shall
determine that a transaction proposal from a third party constitutes a
superior proposal and the Board shall have received a written opinion
of its outside counsel that the failure to accept such superior
proposal could reasonably be expected to result in a breach of the
fiduciary duties of the Board under applicable law, (vii) by Blackhawk
if First Financial fails to take the remedial actions set forth in the
Merger Agreement, or (viii) by Blackhawk, in the event the Closing
Equity is less than $7,136,130 and Blackhawk determines not to
consummate the Merger by paying the minimum Merger Price of $29.00 per
share.
In the event First Financial terminates the Merger Agreement
pursuant to subsections (iv), (v) or (vii) above, First Financial will
pay Blackhawk's out-of-pocket expenses (not to exceed $100,000 for
termination pursuant to subsections (iv) and (v) and not to exceed
$50,000 for termination pursuant to subsection (vii)) incurred in
connection with the Merger Agreement and the Merger.
In the event Blackhawk terminates the Merger Agreement pursuant
to subsections (iv) or (v) above, Blackhawk will pay First Financial's
out-of-pocket expenses (not to exceed $100,000) incurred in connection
with the Merger Agreement and the Merger.
In the event First Financial terminates the Merger Agreement
pursuant to subsection (vi) above, First Financial will pay
Blackhawk's out-of-pocket expenses (not to exceed $100,000) incurred
in connection with the Merger Agreement and the Merger; provided,
however, that if, following such termination, such third party
proposal is not consummated and Blackhawk subsequently enters into an
acquisition agreement with First Financial, then Blackhawk will refund
to First Financial any and all expenses First Financial shall have
paid to Blackhawk in connection with the Merger Agreement and the
Merger.
In the event the Merger Agreement is terminated either (a) by
First Financial pursuant to subsection (vi) above, or (b) by Blackhawk
pursuant to subsection (v) above following failure of First
Financial's stockholders to grant the necessary approval, and First
Financial enters into a definitive agreement with a third party prior
to or within twelve months of such termination, then First Financial
will pay Blackhawk $500,000, reduced by any out-of-pocket expenses
First Financial shall have previously paid to Blackhawk in connection
with the Merger Agreement and the Merger.
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<PAGE>
REGULATORY APPROVAL
Blackhawk applied to the Federal Reserve Board under Section
4(c)(8) of the BHC Act for approval to acquire or control voting
securities of a company engaged in non-banking activities. For
purpose of such regulation, the ownership of the Bank by Blackhawk
would constitute control of a company engaged in a non-banking
activity requiring the approval of the Federal Reserve Board. In
reviewing the application, the Federal Reserve Board considers whether
the acquisition could reasonably be expected to produce benefits to
the public (such as greater convenience, increased competition and
gains in efficiency) that outweigh possible adverse effects (such as
undue concentration of resources, decreased or unfair competition,
conflicts of interest, and unsound banking practices). The Federal
Reserve Board will evaluate the financial and managerial resources of
the applicant, its subsidiaries and of First Financial and the Bank
and the effect of the proposed acquisition on those resources. An
application was filed with the Federal Reserve Board on June 4, 1998.
Blackhawk and First Financial are not aware of any other
governmental approvals or actions that are required for consummation
of the Merger, except as described above. Should any such approval or
action be required, it is presently contemplated that such approval or
action would be sought.
ACCOUNTING TREATMENT
The Merger will be accounted for by Blackhawk under the purchase
method of accounting. Under this method of accounting, the purchase
price will be allocated to assets acquired and liabilities assumed
based on their estimated fair value at the Effective Time.
EXPENSES
The Merger Agreement provides, in general, that Blackhawk and
First Financial will each pay its own expenses in connection with the
Merger Agreement and the transactions contemplated thereby. Under
certain circumstances, however, Blackhawk or First Financial will be
liable to pay the expenses, up to $100,000, of the other party in
connection with the Merger Agreement and the Merger. See "--
Termination and Termination Fees." First Financial will pay all proxy
solicitation and related costs incurred in connection with the Special
Meeting.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of the principal federal income tax
consequences of the Merger is based upon the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the
regulations thereunder, judicial authority and administrative rulings
and practice as of the date hereof, any of which is subject to change
at any time. The following discussion does not address the federal
income tax consequences to special classes of taxpayers, including,
41
<PAGE>
without limitation, persons who are not citizens or residents of the
United States, foreign corporations, and tax exempt entities.
Holders of First Financial Common Stock are encouraged to consult
their tax advisors concerning the federal income tax consequences of
the Merger in their particular circumstances, as well as any tax
consequences arising under foreign, state or local law.
The cancellation of shares of First Financial Common Stock in
exchange for cash pursuant to the Merger will be a taxable transaction
to holders of First Financial Common Stock for federal income tax
purposes and may also be a taxable transaction under applicable state,
local and other tax laws.
In general, a holder of First Financial Common Stock who receives
the Merger Price will recognize gain or loss equal to the difference
between the adjusted tax basis of his or her shares of First Financial
Common Stock and the amount of cash received in exchange therefor.
Such gain or loss will be capital gain or loss if, as should be the
case for most stockholders, the shares are capital assets in the hands
of the stockholder and will be long-term capital gain or loss if the
holding period for the shares is more than one year.
Each holder of a Stock Option who receives the Option
Consideration will recognize ordinary compensation income subject to
applicable federal and state withholding obligations.
Each holder of First Financial Common Stock who receives the
Merger Price in cash and each holder of a Stock Option who receives
the Option Consideration will, in general, be required to provide to
the Paying Agent his, her or its social security or other taxpayer
identification number, or in certain instances other information, in
order to avoid "back-up withholding" requirements which might
otherwise apply under the Code. Any such person who does not furnish
his, her or its correct taxpayer identification number may be subject
to a penalty imposed by the IRS.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE DOES NOT
NECESSARILY SET FORTH ALL OF THE TAX CONSEQUENCES OF THE MERGER THAT
MAY BE RELEVANT TO ALL FIRST FINANCIAL STOCKHOLDERS IN ALL
CIRCUMSTANCES. FIRST FINANCIAL STOCKHOLDERS SHOULD THEREFORE CONSULT
THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE
MERGER, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL OR OTHER TAX
LAWS.
APPRAISAL RIGHTS
Under Section 262 of the DGCL, any holder of First Financial
Common Stock who does not wish to accept the consideration pursuant to
the Merger has the right to seek an appraisal and be paid the "fair
value" in cash of his or her First Financial Common Stock at the
Effective Time (exclusive of any element of value arising from the
accomplishment or expectation of the Merger), as judicially
42
<PAGE>
determined, provided that such holder complies with the provisions of
Section 262 of the DGCL.
The following is a summary of the material statutory procedures
to be followed by a holder of First Financial Common Stock in order to
dissent from the Merger and perfect appraisal rights under Delaware
law. This summary discusses all material provisions of Section 262 of
the DGCL but is not intended to be complete and is qualified in its
entirety by reference to Section 262 of the DGCL, the text of which is
set forth in Appendix C hereto. Any stockholder considering demanding
appraisal is advised to consult legal counsel.
Holders of record of First Financial Common Stock who desire to
exercise their appraisal rights must fully satisfy all of the
following conditions. A written demand for appraisal of First
Financial Common Stock (which demand must identify the holder and
expressly request appraisal) must be delivered before the taking of
the vote on the approval and adoption of the Merger Agreement to:
First Financial Bancorp, Inc. 121 East Locust Street, Belvidere,
Illinois 61008, Attention: Secretary. Such written demand for
appraisal of First Financial Common Stock must be in addition to and
separate from any proxy or vote abstaining from or voting against the
approval and adoption of the Merger Agreement. Abstaining from or
failing to vote against the Merger will not constitute a waiver of
such stockholder's appraisal rights. In addition, voting against the
Merger will not constitute a demand for appraisal under Section 262.
Holders of First Financial Common Stock electing to exercise
their appraisal rights under Section 262 must not vote for the
approval and adoption of the Merger Agreement or consent thereto in
writing. Voting in favor of the approval and adoption of the Merger
Agreement, or delivering a proxy in connection with the Special
Meeting (unless the proxy votes against, or expressly abstains from
the vote on, the approval and adoption of the Merger Agreement), will
constitute a waiver of the stockholder's right of appraisal and will
nullify any written demand for appraisal submitted by the stockholder.
Under Section 262, where a merger is to be submitted for approval
at a meeting of stockholders, as in the case of the Special Meeting,
not less than 20 days prior to the meeting, a constituent corporation
must notify each of the holders of its stock for which appraisal
rights are available that such appraisal rights are available and
include in each such notice a copy of Section 262. This Proxy
Statement constitutes such notice to the record holders of First
Financial Common Stock.
A demand for appraisal must be executed by or for the holder of
record of First Financial Common Stock, fully and correctly, as such
stockholder's name appears on the stock certificates. If shares of
First Financial Common Stock are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, such demand
must be executed by the fiduciary in such capacity. If shares of
First Financial Common Stock are owned of record by more than one
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<PAGE>
person, as in a joint tenancy or tenancy in common, such demand must
be executed by all joint owners. An authorized agent, including an
agent for two or more joint owners, may execute the demand for
appraisal for a stockholder of record; however, the agent must
identify the record owner and expressly disclose the fact that, in
exercising the demand, he is acting as agent for the record owner.
Any stockholder seeking appraisal rights must hold the shares of First
Financial Common Stock for which appraisal is sought on the date of
the making of the demand and must continuously hold such shares
throughout the Effective Time.
A record owner, such as a broker, who holds shares of First
Financial Common Stock as a nominee for others, may exercise appraisal
rights with respect to the shares held for all or less than all
beneficial owners of shares as to which the holder is the record
owner. In such case the written demand must set for the number of
shares of First Financial Common Stock covered by such demand. Where
the number of shares of First Financial Common Stock is not expressly
stated, the demand will be presumed to cover all shares of First
Financial Common Stock outstanding in the name of such record owner.
Beneficial owners who are not record owners and who intend to exercise
appraisal rights should instruct the record owner to comply strictly
with the statutory requirements with respect to the exercise of
appraisal rights before the date of the Special Meeting.
First Financial must, within ten days after the Effective Time
provide notice of the Effective Time to all stockholders who have
complied with Section 262 and have not voted for approval and adoption
of the Merger Agreement.
Within 120 days after the Effective Time, either First Financial
or any holder of First Financial Common Stock who has complied with
the requirement conditions of Section 262 and who is otherwise
entitled to appraisal rights may file a petition in the Delaware
Chancery Court demanding a determination of the fair value of such
shares of First Financial Common Stock. If a petition for an
appraisal is timely filed, after a hearing on such petition, the
Chancery Court will determine which stockholders are entitled to
appraisal rights and thereafter will appraise the shares of First
Financial Common Stock owned by such stockholders determining the fair
value of such shares, exclusive of any element of value arising from
the accomplishment or expectation of the Merger, together with a fair
rate of interest, if any, to be paid, upon the amount determined to be
the fair value. In determining fair value, the Chancery Court is
required to take into account all relevant factors.
Holders of First Financial Common Stock considering appraisal
should understand that the fair value of their shares of First
Financial Common Stock determined under Section 262 could be more
than, the same as, or less than the consideration to be received in
the Merger and that the opinion of a financial advisor as to fairness
is not necessarily an opinion as to fair value under Section 262.
The cost of the appraisal proceeding may be determined by the Chancery
44
<PAGE>
Court and charged to the parties as the Chancery Court deems equitable
in the circumstances. Upon application of a dissenting stockholder,
the Chancery Court may order that all or a portion of the expenses
incurred by any dissenting stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable
attorneys' fees and the fees and expenses of experts, be charged pro
rata against the value of all shares entitled to appraisal. In the
absence of such a determination or assessment, each party bears its
own expenses.
Any holder of First Financial Common Stock who has duly demanded
appraisal in compliance with Section 262 will not, after the Effective
Time, be entitled to vote such shares of First Financial Common Stock
subject to such demand for any purpose or to receive payment of
dividends or other distributions on such shares, except for dividends
or other distributions payable to stockholders of record at a date
prior to the Effective Time.
At any time within 60 days after the Effective Time, any former
holder of shares of First Financial Common Stock will have the right
to withdraw his or her demand for appraisal and to accept the
consideration to be received in the Merger. After this period, such
holder may withdraw his or her demand for appraisal only with the
consent of First Financial, or its successor. If no petition for
appraisal shall cease and all stockholders shall be entitled to
receive the consideration to be received in the Merger. Neither
Blackhawk nor First Financial has any obligation to file such a
petition and, in all likelihood, would not elect to file such a
petition. However, no petition timely filed in the Chancery Court
demanding appraisal shall be dismissed as to any stockholder without
the approval of the Chancery Court and such approval may be
conditioned upon such terms as the Chancery Court deems just.
FAILURE TO FOLLOW ANY STEP REQUIRED BY SECTION 262 IN CONNECTION
WITH THE EXERCISE OF APPRAISAL RIGHTS MAY RESULT IN THE TERMINATION OF
SUCH APPRAISAL RIGHTS.
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ADJOURNMENT OF SPECIAL MEETING
Under certain circumstances, First Financial's management may
determine at the time of the Special Meeting that it is in the best
interests of First Financial and its stockholders to adjourn the
Special Meeting to a later date. For example, in the event that the
number of shares present, in a person or by proxy, at the Special
Meeting is insufficient to constitute a quorum or to approve the
Merger Agreement, First Financial might decide to adjourn the Special
Meeting to permit further solicitation of proxies. First Financial
might also decide to adjourn the Special Meeting in the event that the
parties determine that regulatory approval of the Merger will be
unduly delayed or that events occurring subsequent to the date of this
Proxy Statement require First Financial and Blackhawk to furnish
additional proxy soliciting information to the First Financial
stockholders and to give the stockholders an opportunity to assimilate
such information. If the Special Meeting is adjourned, no further
notice of the time and place of the adjourned meeting is required to
be given to First Financial stockholders other than an announcement of
such time and place at the Special Meeting, provided, however, that if
the date of any adjourned meeting is more than thirty (30) days after
the date for which the meeting was originally noticed, or if a new
record date is fixed for the adjourned meeting, written notice of the
place, date, and time of the adjourned meeting will be given.
If the Special Meeting is postponed or adjourned, at any
subsequent reconvening of the Special Meeting, all proxies will be
voted in the same manner as such proxies would have been voted at the
original convening of the Special Meeting (except for any proxies
which have theretofore effectively been revoked or withdrawn).
In order to approve a proposal for adjournment of the Special
Meeting, the number of the shares present at the Special Meeting, in
person or by proxy, whether or not a quorum is present, and voted in
favor of the proposal must exceed the number of shares voted against
the proposal. In order to allow First Financial's management to vote
proxies received by First Financial at the time of the Special Meeting
in favor of such an adjournment, in the event that First Financial
determines, in its sole discretion, that such an adjournment is in the
best interests of First Financial and its stockholders, First
Financial has submitted the question of adjournment as a separate
matter for the consideration and vote of the stockholders. The Board
of Directors of First Financial recommends that the stockholders vote
FOR the proposal to adjourn the Special Meeting so that such proxies
may be voted in favor of such adjournment under such circumstances.
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BUSINESS
GENERAL
First Financial is a Delaware corporation organized on June 25,
1993 by First Federal Savings and Loan Association of Belvidere (the
"Mutual Association") for the purpose of acquiring all of the capital
stock of the Bank issued in the conversion of the Mutual Association
from mutual to stock form (the "Conversion"). First Financial is
registered as a savings and loan holding company with the Office of
Thrift Supervision. To date, First Financial has not engaged in any
material operations other than holding all of the issued and
outstanding stock of the Bank. See "First Federal Savings Bank" below.
At December 31, 1997, the majority of First Financial's assets
consisted of the investment in the Bank. At March 31, 1998, First
Financial, on an unconsolidated basis, had total assets of $7.8
million and stockholders' equity of $7.7 million.
First Financial employs executive officers and a support staff if
and as the need arises. Such personnel are provided by the Bank and
First Financial pays the Bank a management fee of $565 per month for
such services. First Financial neither owns nor leases any real
property. It presently utilizes the premises, equipment and furniture
of the Bank without the direct payment of any rental fees to the Bank.
First Financial's executive office is located at 121 East Locust
Street, Belvidere, Illinois 61008 and its telephone number is (815)
544-3167.
FIRST FEDERAL SAVINGS BANK
GENERAL. The Bank is a federally chartered savings institution
headquartered in Belvidere, Illinois. The Bank's predecessor, the
Mutual Association, was founded in July 1922 as "Belvidere Building
and Loan Association," a state-chartered stock institution. In 1936,
the Mutual Association converted to mutual ownership under the name
"Belvidere Federal Savings and Loan Association" and received its
federal mutual charter. In 1965, the Bank changed its name to "First
Federal Savings and Loan Association of Belvidere." In 1995, the Bank
changed its name from "First Federal Savings Bank of Belvidere" to
"First Federal Savings Bank." The Bank conducts business from two
full-service offices located in Belvidere, Illinois. Its deposits are
insured up to the maximum allowable amount by the Federal Deposit
Insurance Corporation (the "FDIC"). The Bank is a community-oriented
savings institution engaged primarily in the business of originating
one- to four-family residential mortgage loans in its primary market
area. To a lesser extent, the Bank also originates multi-family and
commercial real estate loans and a variety of consumer loans. The Bank
also invests in various types of securities and assets that are
permissible investments for federal savings banks, including federal
funds, mortgage-backed securities, and securities issued or guaranteed
by the United States Government or agencies thereof. The Bank funds
its lending and investment activities primarily from deposits,
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repayment of principal and interest on its mortgage loans, and by
borrowing from the Federal Home Loan Bank of Chicago (the "FHLB"). At
March 31, 1998, the Bank had total consolidated assets of $81.9
million, total deposits of $67.4 million, advances of $6.4 million,
and stockholders' equity of $7.3 million.
MARKET AREA. The Bank is a community-oriented savings
institution offering a variety of financial products and services to
the communities it serves. The Bank's primary market area is Boone and
Winnebago Counties, located in northern Illinois. To a lesser extent,
the Bank also originates loans in counties in Illinois contiguous to
Boone and Winnebago Counties. Management believes that its offices
are located in communities that can generally be characterized as
stable residential neighborhoods of predominately one- to four-family
residences. The Bank's principal market for deposits is concentrated
in the neighborhoods surrounding its two full service offices in
Belvidere, Illinois.
As of 1990, the aggregate population of Boone and Winnebago
Counties was approximately 284,000. As of December, 1997, the
unemployment rate was 4.2% for the Rockford metropolitan statistical
area, which includes Boone, Winnebago and Ogle Counties, compared to
4.4% nationally.
Until the early 1980's, the economy of northern Illinois and, in
particular, the greater Rockford area was typical of many communities
in the Midwest, consisting of a large agricultural base, most
employment provided by large manufacturing industries, a large pool of
skilled labor, and an extensive transportation infrastructure to
support heavy industry. Boone and Winnebago Counties shared in the
nationwide economic downturn of the early 1980's which adversely
affected heavy industry. Since the early 1980's, the economy of Boone
and Winnebago Counties has improved by reducing its reliance on heavy
industry and by attracting and retaining a diverse array of
industrial, retail and service companies. Currently, manufacturing
accounts for less than 34% of employment and no single company or
industry dominates employment in the area. While no firm employs more
than 3% of the work force, there are many major companies and
employers in the Bank's market area, such as Sundstrand Corporation,
Chrysler Corporation, Camcar Textron, Dean Foods, United Parcel
Service, Motorola, five area hospitals, Champion International,
Central Rubber, Ingersoll Milling Machine, Woodward Governor Company,
Pillsbury/Green Giant, Inc., Barber-Colman Company, Amerock Corp.,
Abar Ipsen, Belvedere Company, Inc., and Franklin Wire Works.
Additionally, from the early 1980's, the Chicago metropolitan market
has grown westward towards the Bank's market area.
The Bank faces significant competition in the origination of
loans from savings and loan associations, other savings banks,
commercial mortgage banking companies, insurance companies, and
banks, many of which have greater financial and marketing resources.
The Bank also faces significant competition in attracting deposits.
Historically, most direct competition for deposits has been from
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savings and loan associations, savings institutions, commercial banks
and credit unions. The Bank faces additional competition for deposits
from short-term money market funds and other corporate and government
securities funds and from other financial institutions such as
brokerage firms and insurance companies. Competition has also
increased as a result of the lifting of restrictions on the interstate
operations of financial institutions.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio consists
primarily of conventional first mortgage loans secured by one- to
four-family residences and, to a lesser extent, multi-family
residences and commercial properties. At December 31, 1997, the Bank's
gross loan portfolio totaled $55.0 million, of which $32.7 million, or
59.4%, were one- to four-family residential mortgage loans held for
investment. At December 31, 1997, $10.6 million, or 19.3%, of the
Bank's gross loan portfolio consisted of one- to four-family mortgage
loans with adjustable interest rates.
The remainder of the Bank's mortgage loans at December 31, 1997
consisted of $10.0 million of multi-family, commercial real estate,
and other mortgage loans and mortgage loans held for sale,
representing 18.2% of gross loans. The Bank's consumer loans consist
of home improvement loans, home equity loans, savings account loans,
automobile loans, credit card loans, and other loans that totaled
$12.3 million, or 22.4%, of gross loans at December 31, 1997.
ANALYSIS OF LOAN AND MORTGAGE-BACKED SECURITIES PORTFOLIOS. The
following table sets forth the composition of the Bank's loan
portfolio, including loans held for sale, and the mortgage-backed
securities portfolio, in dollar amounts and in percentages of the
respective portfolios at the dates indicated.
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<TABLE>
<CAPTION>
At December 31,
--------------------------------------------
1997 1996
----- -----
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
First mortgage loans: (Dollars in Thousands)
1-4 family residential $28,511 51.78% $52,417 70.22%
1-4 family residential, purchased 4,224 7.67 7,792 10.44
Held for sale 2,352 4.27 -- 0.00
Other 7,651 13.90 5,279 7.07
------- ----- ------ -------
Total first mortgage loans 42,738 77.62 65,488 87.73
12,324 22.38 9,157 12.27
Other loans ------- ------- ------- -------
Total loans receivable 55,062 100.00% 74,645 100.00%
======= ====== ======= ======
Less:
Undisbursed loan proceeds -- 197
Unearned discounts, premiums and deferred loan
origination fees, net 59 165
Allowance for loan losses 531 468
------- -------
Total loans receivable, net $54,472 $73,815
======= =======
Mortgage-backed securities:
FHLMC -- --% -- --%
FNMA -- -- -- --
GNMA -- -- -- --
Collateralized mortgage obligations -- -- -- --
------ ------ ------ -------
Total mortgage-backed securities -- --% -- --%
====== ====== ====== =======
Premiums and discounts, net --
------
Total mortgage-backed securities, net -- --
====== ======
Mortgage-backed securities available for sale (at fair
value):
FHLMC -- --% $1,094 11.97%
FNMA -- -- 1,751 19.17
GNMA 1,625 100.00 4,282 46.87
Collateralized mortgage obligations -- -- 2,009 21.99
------ ------- ------ -------
Total mortgage-backed securities available for sale $1,625 100.00% $9,136 100.00%
====== ====== ====== ======
Mortgage-backed securities held to maturity (at amortized
cost):
FHLMC -- --% $ -- --%
FNMA 236 27.76 271 26.06
GNMA -- -- -- --
Collateralized mortgage obligations 614 72.24 769 73.94
------ ------ ------ -------
Total mortgage-backed securities held to maturity 850 100.00% 1,040 100.00%
====== ======
Premiums and discounts, net 14 17
------- -------
Total mortgage-backed securities $ 864 $1,057
held to maturity, net ======= ======
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AT DECEMBER 31,
------------------------------------------------------
1995(1) 1994(2)
------- -------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
(Dollars in Thousands)
First mortgage loans:
1-4 family residential $ 37,536 73.52% $ 35,529 75.69 %
1-4 family residential, purchased 1,605 3.14 1,848 3.94
Held for sale 390 0.76 777 1.65
Other 4,960 9.71 3,191 6.80
------- ------- ------- -------
Total first mortgage loans 44,491 87.14 41,345 88.08
Other loans 6,567 12.86 5,594 11.92
------- ------- ------- -------
Total loans receivable 51,058 100.00% 46,939 100.00%
Less:
Undisbursed loan proceeds 252 216
Unearned discounts, premiums and deferred loan
origination fees, net 246 252
Allowance for loan losses 330 310
------ -------
Total loans receivable, net $ 50,230 $ 46,161
======== ========
Mortgage-backed securities:
FHLMC -- --% -- --%
FNMA -- -- -- --
GNMA -- -- -- --
Collateralized mortgage obligations -- -- -- --
------ ------- ------- -------
Total mortgage-backed securities -- --% -- --%
====== ======= ======= =======
Premiums and discounts, net -- --
------ -------
Total mortgage-backed securities, net $ -- $ --
====== ========
Mortgage-backed securities available for sale
(at fair value)
FHLMC 832 9.76% -- --%
FNMA 1,295 15.20 --
GNMA 4,376 51.36 --
Collateralized mortgage obligations 2,018 23.68 -- --%
------ ------ ------- ------
Total mortgage-backed securities $ 8,521 100.00% $ -- --%
available for sale ======== ====== ======== ======
Mortgage-backed securities held to maturity
(at amortized cost):
FHLMC 135 10.41% 889 8.55%
FNMA 302 23.28 1,767 17.01
GNMA -- -- 4,790 46.11
51
<PAGE>
Collateralized mortgage obligations 860 66.31 2,943 28.33
----- ------ ------ ------
Total mortgage-backed securities held to maturity 1,297 100.00% 10,389 100.00%
======= =======
Premiums and discounts, net 21 307
----- -----
Total mortgage-backed securities $ 1,318 $10,696
held to maturity, net ======== ======
</TABLE>
_____________________
(1) First Financial reclassified substantially all of its mortgage-
backed securities to available-for-sale in December 1995 under
a window of opportunity provided under SFAS 115.
(2) First Financial adopted FASB 115 "Accounting for Certain Debt
and Equity Securities" as of January 1, 1994, which resulted
in First Financial's classifying all mortgage-backed securities
as available for sale, held to maturity or trading.
<TABLE>
<CAPTION>
At December 31,
1993
------------------------------
Amount Percent
------------ -----------
(Dollars in Thousands)
<S> <C> <C>
First mortgage loans:
1-4 family residential
1-4 family residential, purchased $ 26,608 62.85%
Held for sale 2,202 5.20
Other 8,443 19.95
619 1.46
Total first mortgage loans ------- ---------
Other loans 37,872 89.46
4,462 10.54
Total loans receivable ------- ---------
42,334 100.00%
=========
Less:
Undisbursed loan proceeds 495
Unearned discounts, premiums and deferred loan
origination fees, net 196
Allowance for loan losses 343
Total loans receivable, net ---------
$ 41,300
=========
Mortgage-backed securities:
FHLMC $ 1,036 10.21%
FNMA 2,087 20.56
GNMA 4,320 42.56
Collateralized mortgage obligations 2,708 26.67
-------- ---------
Total mortgage-backed securities 10,151 100.00%
==========
Premiums and discounts, net 285
---------
Total mortgage-backed securities, net $ 10,436
=========
52
<PAGE>
Mortgage-backed securities available for sale (at fair value):
FHLMC $ -- --
FNMA -- --%
GNMA -- --
Collateralized mortgage obligations -- --
---------- ----------
Total mortgage-backed securities available for sale $ -- --%
========== ==========
Mortgage-backed securities held to maturity (at amortized cost):
FHLMC $ -- --%
FNMA -- --
GNMA -- --
Collateralized mortgage obligations -- --
---------- ----------
Total mortgage-backed securities held to maturity -- -- %
==========
Premiums and discounts, net --
-----------
Total mortgage-backed securities
held to maturity, net $ --
=========== ==========
</TABLE>
53
<PAGE>
LOAN MATURITY SCHEDULE. The following table sets forth certain
information as of December 31, 1997, regarding the dollar amount of
gross loans maturing in the Bank's portfolio based on their
contractual terms to maturity. Demand loans and credit card loans,
loans having no stated schedule of repayments and no stated maturity,
and overdrafts are reported as due in one year or less. All other
loans are included in the period in which the final contractual
repayment is due.
<TABLE>
<CAPTION>
BEYOND
WITHIN 1-3 3-5 5-10 10-20 20
1 YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
------- ----- ----- ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
First mortgage loans(1) $ 1,023 $ 5,917 $ 6,484 $ 8,527 $ 4,723 $ 16,604 $ 42,738
Other loans(2) 3,334 1,835 3,223 988 2,944 -- 12,324
------ ------ ------ ----- ------ ----- ------
Total $ 4,357 $ 7,752 $ 9,707 $ 9,515 $ 7,667 $ 16,064 $ 55,062
====== ====== ====== ====== ====== ====== ========
____________________
</TABLE>
(1) Includes loans held for sale at market value.
(2) Within 1 year includes $754,000 in credit card receivables.
The following table sets forth the dollar amount of all gross
loans at December 31, 1997, which have predetermined interest rates
and have floating or adjustable interest rates and which are due after
December 31, 1998.
<TABLE>
<CAPTION>
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(In Thousands)
<S> <C> <C> <C>
First mortgage loans(1) $ 31,071 $ 10,644 $ 41,715
Other loans 4,987 4,003 8,990
------ ------- -----
Total $ 36,058 $ 14,647 $ 50,705
======= ======== =========
</TABLE>
____________________
<F1> Includes loans held for sale at market value.
ORIGINATING AND SELLING ONE- TO FOUR-FAMILY MORTGAGE LOANS. The
Bank's primary lending activity is the origination of first mortgage
loans secured by one- to four-family residential properties. Single
family residential owner-occupied mortgage loans are underwritten in
conformity with the criteria established by the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage
Corporation ("FHLMC"), the Government National Mortgage Association
("GNMA"), the Federal Home Administration ("FHA") and the Department
of Veteran's Affairs (the "VA"), and are eligible for sale to such
agencies, with the exception of loans exceeding applicable agency
dollar limits. To a lesser extent, the Bank originates loans secured
by non-owner occupied one- to four-family residential real estate.
54
<PAGE>
One- to four-family residential mortgage loans originated by the
Bank are generally for terms ranging from three to 30 years, amortize
on a monthly basis, and have principal and interest due each month.
Such real estate loans often remain outstanding for significantly
shorter periods than their contractual terms to maturity, particularly
in a declining interest rate environment. Borrowers may refinance or
prepay loans at their option without penalty. One- to four-family
residential mortgage loans originated by the Bank customarily contain
"due-on-sale" clauses which permit the Bank to accelerate the
indebtedness of the loan upon transfer of ownership of the mortgaged
property. Due-on-sale clauses are an important means of increasing the
interest rate on existing mortgage loans during periods of rising
interest rates.
The Bank originates fixed-rate mortgage loans amortized on a
monthly basis with principal and interest due monthly. In recent years
the Bank has generally retained in its loan portfolio only fixed-rate
mortgage loans with terms of less than 15 years and has held for sale
or sold on a non-recourse basis fixed-rate mortgage loans with terms
greater than or equal to 15 years, subject to the Bank's interest-rate
risk management policies. In 1997, a significant portion of First
Financial's portfolio fixed-rate mortgage loans were sold in
conjunction with the restructuring of the balance sheet (See
Management's Discussion and Analysis -- Financial Condition).
Fixed-rate mortgage loans with terms greater than 15 years are
generally held for sale or sold on a non-recourse basis, with
servicing retained (except for FHA and VA loans, which are sold on a
servicing-released basis).
The Bank has purchased participating interests in first mortgage
loans. Management's analysis of such loans in terms of underwriting,
collection techniques, evaluation of reserves and delinquency status
is the same as for one- to four-family residential mortgage loans
originated by the Bank. Based on the foregoing, management of the Bank
does not believe that such participations present any materially
greater risk of delinquency than one- to four-family residential
mortgage loans originated by the Bank.
The Bank also originates adjustable rate mortgage ("ARM") loans
to reduce interest rate risk. The Bank originates one-year ARM loans
which adjust in relationship to U.S. Treasury rates. ARM loans are
originated with terms ranging from 15 to 30 years. Currently, ARM
loans originated by the Bank provide for maximum adjustments of 2% per
adjustment, with overall interest rate caps of 6% and interest rate
floors of 1% under the initial interest rate. The Bank originated $1.2
million in ARM loans during the year ended December 31, 1997, as
compared to $4.1 million for the year ended December 31, 1996.
The Bank's current lending policy generally is to originate and
retain in its portfolio ARM loans. During the year ended December 31,
1997, the Bank originated $1.2 million in ARM loans, and at December
31, 1997, $10.6 million, or 19.3%, of the Bank's gross loan portfolio
consisted of ARM loans. ARM loans generally pose a risk that as
interest rates rise, the amount of a borrower's monthly loan payment
also rises, thereby increasing the potential for delinquencies and
55
<PAGE>
loan losses. At the same time, the marketability of such loans may be
adversely affected by higher rates.
The Bank's lending policies generally limit the maximum
loan-to-value ratio on one- to four-family mortgage loans secured by
owner-occupied properties to 80% of the lesser of the appraised value
or purchase price of the property. The Bank originates some loans with
up to 97% loan-to-value ratios on which it charges a higher effective
interest rate; however, the Bank's policy is to require private
mortgage insurance on loans with a loan-to-value ratio in excess of
80%.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY LENDING. The Bank
originates commercial real estate and multi-family loans on a limited
basis. At December 31, 1997, such loans represented 17.9% of the
Bank's mortgage loan portfolio and 13.9% of the Bank's gross loan
portfolio. The Bank generally does not solicit such loans, and
originates such loans selectively and on a case-by-case basis. During
1998, the Bank plans to expand its commercial real estate loan
portfolio as a means to increase net interest margins and overall
profitability. The Bank originated $0.5 million of commercial and
multi-family real estate loans in 1997. At December 31, 1997, the
Bank's commercial real estate and multi-family real estate loan
portfolio totaled $7.7 million. The largest loan at December 31, 1997
was $690,000.
The Bank's commercial real estate loans typically are secured by
office buildings, retail shopping stores, light industrial/warehouse
facilities and buildings for religious institutions. The Bank
generally makes such loans in amounts up to 80% of the appraised value
of the property.
The Bank's multi-family loans are typically secured by
residential properties containing 6, 8 or 12 dwelling units located in
its primary market area. None of the Bank's multifamily loans are
secured by residential properties containing more than 64 units. The
Bank makes such loans in amounts up to 80% of the appraised value of
the property. The Bank generally requires a positive cash flow on all
multi-family properties. Multi-family loans are offered with fixed or
adjustable interest rates. Fixed-rate and adjustable rate loans
generally bear interest rates which are keyed to interest rates paid
on U.S. Treasury issues.
Multi-family and commercial real estate loans generally are for
larger loan amounts and involve greater risks than one- to four-family
residential mortgage loans. Because payments on loans secured by such
properties are often dependent on the successful operation or
management of the properties, repayment of such loans may be subject
to a greater extent to adverse conditions in the real estate market or
the economy. The Bank seeks to minimize these risks in a variety of
ways, including limiting the size of such loans and strictly
scrutinizing the financial condition of the borrower, the quality of
the collateral and the management of the property securing the loan.
The Bank obtains appraisals on each property in accordance with
applicable regulations.
56
<PAGE>
CONSUMER, HOME EQUITY AND OTHER LENDING. The Bank also offers a
variety of consumer loans which consist primarily of home equity
loans, but which also include home improvement loans, installment
loans secured by automobiles, savings account loans and other secured
and unsecured consumer loans.
The Bank began a controlled re-entry into indirect auto lending
during the year ended December 31, 1994. During 1997 the Bank
increased its participation in the indirect auto market. Management of
the Bank does not, however, currently anticipate that indirect auto
loans will constitute a significant part of its consumer loan
portfolio in the immediate future.
The Bank offers home equity loans which are line of credit loans
secured by a first or second mortgage on one- to four-family,
owner-occupied residential properties located in its market area. Home
equity line of credit loans are offered with adjustable interest rates
only and currently have terms of five to twenty years. The Bank also
offers fixed-rate fixed-term second mortgage and home improvement
loans. As of December 31, 1997, the Bank's consumer and commercial
loan portfolio totaled $12.3 million, or 22.4%, of the Bank's gross
loan portfolio. Of the consumer loan portfolio, home improvement,
second mortgage and home equity loans comprised $6.8 million, or
13.0%, of the Bank's gross loan portfolio, and other loans
(approximately $2.4 million of which were secured by automobiles)
comprised $6.7 million, or 12.1%, of the Bank's gross loan portfolio.
In addition, the Bank offers unsecured consumer loans through its
Visa and MasterCard programs. Management believes that these loans,
which carry a higher rate of interest, can enhance net interest income
when offered in conjunction with a prudent credit risk policy and
collection program. Such loans made up $0.8 million or 1.4% of the
gross loan portfolio as of December 31, 1997.
Consumer loans entail greater risks than do one- to four-family
residential mortgage loans, particularly in the case of consumer loans
which are unsecured or secured by rapidly depreciable assets such as
automobiles. In such cases, any repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the
outstanding loan balance, since there is a greater likelihood of
damage, loss or depreciation of the underlying collateral. Further,
the remaining deficiency in some cases does not warrant further
substantial collection efforts against the borrower. In addition,
consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected
by job loss, divorce, illness or personal bankruptcy. Furthermore, the
application of various federal and state laws, including federal and
state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. The Bank's level of consumer loan
delinquencies generally has been low. No assurance can be given,
however, that the Bank's delinquency rate on consumer loans will
continue to remain low in the future.
LOAN CONCENTRATION. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") amended the Home Owners' Loan
57
<PAGE>
Act of 1933 ("HOLA") to limit the amount of credit a savings
institution could extend to any single borrower or related group of
borrowers generally to 15% of the savings institution's unimpaired
capital and surplus. The applicable regulations also provide that
additional amounts of credit may be extended to such borrowers, in
certain circumstances, in amounts up to 10% of the savings
institution's unimpaired capital and surplus, if such credit is
secured by readily marketable collateral, which generally does not
include real estate. Loans originated prior to the enactment of the
FIRREA, however, are deemed to comply with the limits imposed by the
FIRREA if made in accordance with the then applicable lending limits.
At December 31, 1997, the Bank had no loans in excess of its loan to
one borrower limitation. At December 31, 1997, the maximum dollar
amount of loans to one borrower that the Bank was authorized to make
was $1,153,000. At that date, the largest concentration of loans to
one borrower totaled $690,000.
LOAN ORIGINATION, PURCHASE, SALE AND SERVICING ACTIVITIES.
Mortgage loan applications are accepted at the Bank's Locust Street
Office, and by commissioned loan originators employed by the Bank who
accept applications from throughout the Bank's market area. The Bank
also accepts consumer loan applications at its Locust Street office.
Loans are generated through the Bank's marketing efforts, its present
customers, walk-in customers and referrals from real estate brokers,
builders, local businesses and commissioned loan originators. The Bank
generally originates one- to four-family residential mortgage loans in
conformity with FNMA, FHLMC and other agency guidelines to facilitate
the sale of fixed-rate residential mortgage loans in the Bank's
secondary mortgage market operations. The Bank also originates loans
in amounts exceeding agency guidelines.
Each fixed-rate mortgage loan that is originated for sale is held
in the Bank's held for sale portfolio until a commitment has been
obtained from FNMA, FHLMC or another financial institution to purchase
the loan or group of loans. The Bank's loans are sold without
recourse. Generally ARM loans and fixed-rate loans with terms of less
than 15 years are retained in the Bank's portfolio. Gains or losses
resulting from sales of loans are recorded at the time of sale and are
determined by the difference between the net sales proceeds and the
carrying value of loans sold.
The Bank has capitalized the cost of mortgage servicing rights
("MSRs") on mortgages originated after December 31, 1994 which have
been sold or securitized. The allocation of the total cost of the
mortgages to MSRs and the mortgages (without MSRs) is based on their
relative fair values. MSRs are amortized in proportion to and over the
period of estimated net servicing income.
The gross servicing fee income from loans originated is generally
1/4% to 3/8% of the total balance of the loan serviced. When servicing
is retained at other than a normal servicing fee, an additional gain
or loss is recognized and an excess servicing fee receivable or
payable is recorded at the time of sale based upon the net present
value of expected amounts to be received or paid resulting from the
difference between the contractual interest rates received from the
58
<PAGE>
borrowers and the rate paid to the buyer. The resulting servicing fee
premium or discount is amortized or accreted to loan servicing income
over the estimated remaining life of the loans sold.
At December 31, 1997, the Bank's portfolio of loans serviced for
others totaled $69.2 million. Loan servicing fees and charges for the
years December 31, 1997, 1996 and 1995 were $209,000, $198,000 and
$185,000, respectively.
The table below shows the Bank's loan originations, sales and
repayments of loans for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Loans receivable and loans held for sale (gross): (In Thousands)
At beginning of the period $ 74,645 $ 51,058 $ 46,939
-------- ------- -------
Originations:
First mortgage loans:
1-4 family residential, portfolio 4,234 21,797 6,466
1-4 family residential, held for sale 12,502 6,492 7,650
Other 483 1,115 1,717
------- ------- ------
Total first mortgage loans 17,219 29,404 15,833
Other loans 10,049 6,286 6,453
------- ------- ------
Total originations 27,268 35,690 22,286
Principal repayments (17,827) (5,350) (10,663)
Sale of first mortgage loans (29,614) (6,753) (7,504)
------- ------ ------
Net loan activity (20,173) 23,587 4,119
------- ------ -----
At end of the period $ 54,472 $ 74,645 $ 51,058
======== ======== ========
</TABLE>
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Bank accepts
consumer loan applications at its Locust Street office and mortgage
loan applications at its Locust Street office. For all loans
originated by the Bank, upon receipt of a completed loan application
from a prospective borrower, a credit report is ordered, income and
certain other information generally is verified and, if necessary,
additional financial information is required. All borrowers of one- to
four-family residential mortgage loans are qualified pursuant to
applicable agency guidelines except that the Bank may make loans in
amounts exceeding applicable agency limits. The Bank's policies
require appraisals on all real estate intended to secure a proposed
loan, which currently are performed by independent appraisers
designated and approved by the Bank. The Board annually approves the
independent appraisers used by the Bank and reviews the Bank's
appraisal policy. It is the Bank's policy to obtain title insurance on
all real estate first mortgage loans. Borrowers must also obtain
hazard insurance prior to closing. Borrowers generally are required to
59
<PAGE>
advance funds on a monthly basis together with each payment of
principal and interest to a mortgage escrow account from which the
Bank makes disbursements for items such as real estate taxes and
hazard insurance premiums.
Certain officers have authority to approve loans up to specified
dollar amounts. All one- to four-family first mortgage loans of
$300,000 or less may be approved by the Vice President of Lending.
One- to four-family mortgage loans in excess of $300,000 must be
approved by the Loan Committee. Secured and unsecured consumer loans
may be approved by the Vice President of Lending in amounts up to
$50,000 for secured and unsecured loans. Consumer loans in excess of
these amounts must be approved by the Loan Committee. All mortgage
loans and consumer loans are ratified by the Board of Directors at its
regular monthly meetings.
MORTGAGE-BACKED SECURITIES. The Bank also invests in
mortgage-backed securities. At December 31, 1997, net mortgage-backed
securities totaled $2.5 million, or 3.0%, of total assets consisting
of $0.6 million of fixed-rate mortgage-backed securities and $1.9
million of adjustable-rate mortgage-backed securities. As of December
31, 1997, mortgage-backed securities were insured or guaranteed by
either the Government National Mortgage Association ("GNMA"), the
Federal National Mortgage Association ("FNMA"), or the Federal Home
Loan Mortgage Corporation ("FHLMC"), or in the case of collateralized
mortgage obligations ("CMOs"), backed by the collateral of such
agencies. At December 31, 1997, 1996 and 1995, the amortized cost of
the Bank's net mortgage-backed securities portfolio totaled $2.5
million, $10.2 million, and $9.8 million, respectively.
The Bank maintains its mortgaged-backed securities investments in
two separate portfolios, a held-to-maturity portfolio, which consists
of mortgage-backed securities purchased with the intent to hold to
maturity and an available-for-sale portfolio, which consists of
securities held for liquidity and asset/liability management purposes.
Mortgage-backed securities in the held-to-maturity portfolio are
accounted for on an amortized cost basis and those in the
available-for-sale portfolio are accounted for on a market value basis
with unrealized profit and losses affecting stockholders' equity
pursuant to SFAS 115. Such securities are liquid and, therefore, they
are categorized as available for sale. In 1995, the Bank reclassified
substantially all of its held-to-maturity portfolio to the
available-for-sale classification, allowing for active management of
more of the Bank's portfolio.
Mortgage-backed securities typically are issued with stated
principal amounts, and the securities are backed by pools of mortgage
loans with varying interest rates and maturities. The mortgage loans
backing the mortgage-backed securities can be either fixed-rate or ARM
loans. The interest rate risk characteristics of the underlying pool
of mortgages as well as the prepayment risk are passed on to the
holder of the mortgage-backed securities. Consequently, in a declining
interest rate environment there is a risk that mortgage-backed
securities will prepay faster than anticipated thereby adversely
affecting the yield to maturity and the related market value of the
60
<PAGE>
mortgage-backed securities. Moreover, there can be no assurance that
the Bank would be able to reinvest the cash flow from prepaid
mortgage-backed securities into comparable yielding investments. In a
rising interest rate environment the value of the mortgage-backed
securities may be impaired since the risk of default of
mortgage-backed securities backed by ARM loans is increased, and the
mortgage-backed securities with fixed-rate underlying mortgage loans
will be worth less as investors seek higher yielding investments.
Set forth below is a table showing the Bank's purchases, sales
and repayments of mortgage-backed securities for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Mortgage-backed securities (net):
At beginning of the period $ 10,193 $ 9,839 $ 10,696
Purchases -- 1,753 137
Sales (6,954) -- --
Principal repayments<F1> (736) (1,335) (818)
Unrealized loss on mortgage-bac (14) (64) (176)
securities available for sal --- --- ----
At end of the period $ 2,489 $ 10,193 $ 9,839
======= ======= =======
</TABLE>
______________________
(1) Includes amortization/accretion of premiums/discounts.
Set forth below is a table showing the Bank's ARM and fixed-rate
mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
1997 1996 1995
------------- ------------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities, net:
Adjustable rate<F1> $ 1,867 75.01% $ 6,995 68.63% $ 7,132 72.61%
Fixed-rate<F2> 622 24.99 3,198 31.37 2,707 27.39
----- -------- ----- ------- ------ -----
Total mortgage-backed securities, net $ 2,489 100.00% $10,193 100.00% $ 9,839 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
_____________________
(1) Includes CMOs with carrying value of $318,000 and $317,000 in 1996
and 1995, respectively.
(2) Includes CMOs with carrying value of $622,000, $2,778,000, and
$2,883,000 in 1997, 1996 and 1995, respectively.
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENT LOANS. The Asset Review Committee performs a monthly
review of all delinquent loans, which is then presented to the Board
of Directors. The procedures taken by the Bank with respect to
delinquencies vary depending on the nature of the loan and period of
delinquency.
61
<PAGE>
The Bank's policies generally provide that delinquent mortgage
loans be reviewed and that a written late charge notice be mailed no
later than the 15th day of delinquency. The policies also require
telephone contacts for loans more than 30 days delinquent and no later
than the 40th day of delinquency to ascertain the reasons for the
delinquency and the prospects of repayment. A second telephone contact
is attempted after a loan has been delinquent for 45 days.
Face-to-face interviews and collection notices are generally required
for FHA and VA loans more than 60 days delinquent and, on a case by
case basis, for other mortgage loans. After 90 days, the Bank will
either set a date by which the loan must be brought current, enter
into a written forbearance agreement, foreclose on any collateral or
take other appropriate action. The Bank's policies regarding
delinquent consumer loans are similar except that telephone contacts
and correspondence will generally occur after a consumer loan is more
than 15 days delinquent.
The Bank's general policy is to continue to accrue interest on
all loans 59 days past due and discontinue the accrual of interest on
a case-by-case basis. The Bank will discontinue the accrual of
interest on loans and establish a reserve upon a determination that
the loan may result in a loss. Interest on loans contractually
delinquent 60 days or more is excluded from earnings unless, in
management's judgment, collectibility is highly probable, collection
efforts are in progress, and the loans are adequately collateralized.
Property acquired by the Bank as a result of a foreclosure on a
mortgage loan is classified as real estate owned ("REO") and is
recorded at the lower of the investment on the related loan or fair
value at the date of acquisition and carried at the lower of cost or
fair value, less selling costs. At December 31, 1997, the Bank had
$41,000 in loans that were 90 days or more delinquent, of which $7,000
were secured by one- to four-family residences, and $34,000 in
consumer loans. At December 31, 1997, the Bank had no REO.
In 1995 the Bank adopted SFAS 114, "Accounting by Creditors for
Impairment of a Loan", which was amended by SFAS 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and
Disclosures". SFAS 114 requires that impaired loans, those on which
the Bank will be unable to collect all amounts due, including
principal and interest under the contractual terms of the loan, be
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate, or at the loan's
market price or the fair value of the collateral, if the loan is
collateral dependent. SFAS 114 is applicable to all creditors and to
all loans regardless of whether they are collateralized and does
permit the collective valuation of impairment for large groups of
smaller-balance homogenous loans. The impact of adopting SFAS 114 in
1995 has not been material to the Bank since all of the Bank's
impaired loans are collateral dependent and the method of measuring
loss on these loans has not changed from the prior year.
CLASSIFIED ASSETS. Federal regulations require the
classification of loans and other assets such as debt and equity
62
<PAGE>
securities, considered by the OTS to be of lesser quality, as
"substandard," "doubtful" or "loss" assets. The Bank's classification
policies provide that assets will be classified according to OTS
regulations. An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of
the obligor or of the collateral pledged, if any. "Substandard" assets
include those characterized by the "distinct possibility" that the
insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified as "substandard," with the
added characteristic that the weaknesses present make "collection or
liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets
classified as "loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient
risk to warrant classification in one of the aforementioned categories
but possess weaknesses are required to be designated "special mention"
by management. As of December 31, 1997, the Bank had $678,000 of loans
classified as substandard, $106,000 in loans classified as doubtful or
loss, and $179,000 of loans classified as special mention in loans 89
days or less. The Bank had $934,000 in classified assets less than 89
days, which were delinquent at December 31, 1997.
63
<PAGE>
The following table sets forth the amount of outstanding loans
classified at December 31, 1997, in each of the categories listed.
<TABLE>
<CAPTION>
At December 31, 1997
--------------------------------------------------
Doubtful Special
Substandard or Loss Mention Total
----------- --------- ------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Loans delinquent 90 days or more:
Accruing $ -- $ -- $ -- $ --
Non-accruing:
First mortgage loans:
1-4 family residential $ -- $ 7 $ -- $ 7
Other loans. -- -- -- --
Other loans 4 30 -- 34
---- ---- ---- ----
Total 4 37 -- 41
---- ---- --- ----
Total classified loans delinquent 4 37 -- 41
90 days or more ---- ---- ---- ----
Loans delinquent 60-89 days:
Accruing $ -- $ -- $ -- $ --
Non-accruing:
First mortgage loans:
1-4 family residential $ 283 $ 96 $ -- $ 379
Other loans 61 -- -- 61
Other loans 67 10 -- 77
--- --- --- ---
411 106 -- 517
Total --- --- --- ----
Total classified loans delinquent 411 106 -- 517
60-89 days --- --- ----- ----
Other accruing classified loans -- -- 179 179
Other non-accruing classified loans 267 -- -- 267
---- ---- ---- ----
267 -- 179 446
Total other classified loans ---- --- ---- ----
$ 682 $ 143 $ 179 $ 1,004
Total classified loans ===== ==== ==== ======
</TABLE>
The Bank's policies provide that the Board of Directors review a
report of all classified assets on a monthly basis and that such
classified asset reports be provided to the OTS on a quarterly basis.
When the Bank determines that an asset should be classified, it
generally does not establish a specific allowance for such asset
unless it determines that a loss on such asset is evident. The Bank
may increase, however, its general valuation allowance in an amount
deemed prudent. General valuation allowances represent loss allowances
which have been established to recognize the inherent risk associated
64
<PAGE>
with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. The Bank's policies
provide for the establishment of a specific allowance equal to 100% of
each asset classified as "loss" or to charge-off such amount. A
savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review
by the OTS which can order the establishment of additional general or
specific loss allowances. The Bank reviews the problem loans in its
portfolio on a monthly basis to determine whether any loans require
classification in accordance with applicable regulations and believes
its classification policies are consistent with OTS policies. First
Financial streamlined its review of non-performing and delinquent
loans during 1997. Generally, loans are considered non-accrual, and
therefore non-performing, at an earlier point in the delinquency cycle
under the new review process.
The specific valuation allowances established by the Bank for
different categories of loans at the dates shown, were as follows.
At December 31,
---------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Mortgage loans $ - $ - $ -
Direct consumer loans 8 13 18
Indirect consumer loans 2 2 9
---- ----- -----
$ 10 $ 15 $ 27
Total ==== ===== ====
65
<PAGE>
DELINQUENT LOANS AND NON-PERFORMING ASSETS. The following table
sets forth information regarding delinquent loans, other non-accruing
loans, and REO at the dates indicated. As of the dates indicated, the
Bank did not have any material restructured loans within the meaning
of SFAS 15, as amended by SFAS 114.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Loans delinquent 90 days or more:
Accruing:
First mortgage loans:
1-4 family residential $ -- $ -- $ 196 $ 11 $ 126
Other loans -- -- 3 4 20
----- ----- ---- ---- ----
Total -- -- 199 15 146
----- ----- ---- ----- ----
Non-accruing:
First mortgage loans:
1-4 family residential 7 113 82 74 93
Other loans -- 4 -- -- --
Other loans 34 27 118 40 61
---- ---- ---- ---- ----
Total 41 144 200 114 154
---- ---- ---- ---- ----
Loans delinquent 89 days or less:
First mortgage loans:
1-4 family residential 380 -- -- -- --
Other loans 289 -- -- -- --
Other loans 115 2 19 -- --
---- ---- ---- ---- ----
Total non-performing loans 825 146 418 129 300
Total real estate owned, net of related
allowance for losses -- -- -- -- --
---- ------- ------ ----- ----
Total non-performing assets $ 825 $ 146 $ 418 $ 129 $ 300
==== ==== ==== ==== ====
Total non-performing loans to
net loans receivable(1) 1.51% 0.20% 0.83% 0.28% 0.73%
Total non-performing loans to
total assets 1.00 0.15 0.56 0.18 0.44
Total non-performing loans and REO
to total assets 1.00 0.15 0.56 0.18 0.44
</TABLE>
___________________
(1) Net loans receivable includes loans held for sale.
66
<PAGE>
DELINQUENT LOANS. The following table sets forth information
with respect to loans delinquent 60-89 days in the Bank's loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Loans delinquent 60-89 days:
First mortgage loans:
1-4 family residential(1) $379 $ 33 $ 122 $ 143 $ 427
Other first mortgage loans 61 -- -- -- --
Other loans 77 31 12 15 27
---- ---- ---- ---- ----
Total loans delinquent 60-89 days $ 517 $ 64 $ 134 $ 158 $ 454
==== ==== ==== ==== ====
</TABLE>
____________________
(1) Includes loans sold with recourse of $19,000 at December 31,
1994 and $12,000 at December 31, 1993.
The following table sets forth information with respect to
the Bank's delinquent loans and other problem assets at December 31,
1997.
<TABLE>
<CAPTION>
At December 31, 1997
--------------------
Balance Number
------- ------
First mortgage loans: (Dollars In Thousands)
<S> <C> <C>
1-4 family residential and other:
Loans 30-59 days delinquent $ 1,353 32
Loans 60-89 days delinquent 379 9
Loans 90 days or more delinquent 7 3
Other first mortgage loans 60-89 days delinquent 61 1
Other loans:
Loans 30-59 days delinquent 151 22
Loans 60-89 days delinquent 77 8
Loans 90 days or more delinquent 34 9
Real estate owned -- --
Loans to facilitate sale of real estate owned -- --
------ -----
Total delinquent loans and other problem assets $ 2,062 84
====== =====
</TABLE>
ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is
maintained at a level considered adequate to absorb future loan
losses. Management of the Bank, in determining the provision for loan
losses, considers the risks inherent in its loan portfolio and changes
in the nature and volume of its loan activities, along with the
general economic and real estate market conditions. The Bank utilizes
a two tier approach: (i) identification of problem loans and the
establishment of specific loss allowances on such loans; and (ii)
establishment of general valuation allowances on the remainder of its
loan portfolio of which credit cards and other credit lines are
67
<PAGE>
reserved against the total credit lines. The Bank maintains a loan
review system which allows for a periodic review of its loan portfolio
and the early identification of potential problem loans. Such system
takes into consideration, among other things, delinquency status, size
of loans, type of collateral and financial condition of the borrowers.
Specific loan loss allowances are established for identified loans
based on a review of such information and/or appraisals of the
underlying collateral. Although the Bank maintains its allowance for
losses on loans at a level which it considers to be adequate to
provide for potential losses, there can be no assurance that such
losses will not exceed the estimated amounts or that the Bank will not
be required to make additions to the allowance for losses on loans in
the future. Future additions to the Bank's allowance for loan losses
and any changes in the related ratio of the allowance for loan losses
to non-performing loans are dependent upon the economy, changes in
real estate values and interest rates, the view of the regulatory
authorities toward adequate reserve levels, and inflation. Analysis
of the Allowance for Loan Losses. The following table sets forth
information with respect to the Bank's allowance for loan losses at or
for the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Total net loans outstanding<F1> $54,472 $73,815 $50,233 $46,161 $41,300
Average loans outstanding<F1> 63,282 67,621 48,205 41,383 39,815
Allowance balances:
At beginning of period 468 330 310 343 169
Provision for losses:
First mortgage loans 10 72 34 1 62
Other loans 78 110 5 3 117
Charge-offs:
Other loans 27 44 19 38 10
Recoveries:
Other loans
2 -- -- 1 5
------- ------- ------- ------- -------
At end of period $ 531 $ 468 $ 330 $ 310 $ 343
======== ======== ======== ======== ========
Allowance for loan losses as a percent of
total loans outstanding at end of period 0.97% 0.63% 0.66% 0.67% 0.83%
Net loans charged off as a percent of
average loans outstanding 0.04 0.07 0.04 0.09 0.01
Ratio of allowance for loan losses to total
non-performing loans at end of period 64.36 320.55 78.95 240.31 114.33
Ratio of allowance for loan losses to total
non-performing assets at end of period 64.36 320.55 78.95 240.31 114.33
</TABLE>
___________________
(1) Includes loans held for sale.
68
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table
sets forth the allocation for loan losses by loan category for the
periods indicated.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ -----------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to :
First mortgage loans:
1-4 family residential $132 59.45% $168 80.66% $133 76.67%
Held for sale -- 4.27 -- -- -- 0.76
Other 86 13.90 40 7.07 37 9.71
Other loans 313 22.38 260 12.27 160 12.86
---- ----- --- ----- ---- -----
Total allowance for loan losses $531 100.00% $468 100.00% $330 100.00%
==== ======= ==== ======= ==== =======
</TABLE>
SECURITIES ACTIVITIES. Federally chartered savings institutions
have the authority to invest in various types of liquid assets,
including U.S. Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured associations and
savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions,
federally chartered savings institutions may also invest their assets
in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally
chartered savings institution is otherwise authorized to make
directly. Additionally, the Bank must maintain minimum levels of
investments that qualify as liquid assets under OTS regulations.
Historically, the Bank has maintained liquid assets above the minimum
OTS requirements, and its average liquidity ratio of 16.21% for
December 1997 exceeded the 4% regulatory liquidity requirement. The
Bank believes that its average level of liquid assets is adequate to
meet its normal daily activities.
The securities policy of the Bank established by the Board of
Directors attempts to provide and maintain liquidity, generate a
favorable return on securities without incurring undue interest rate
and credit risk, and complement the Bank's lending activities. The
Bank's policies generally limit securities to investments qualifying
as eligible securities under OTS regulations. At December 31, 1997,
the Bank had securities (including FHLB stock) in the aggregate amount
of $17.4 million with a market value of $17.5 million. At December 31,
1997, the Bank's securities portfolio consisted of $10.8 million of
U.S. Government and federal agency obligations, an increase of $6.8
million since December 31, 1996. The Bank also invests in ARM mutual
funds which invest in FNMA, FHLMC and other federal agency obligations
At December 31, 1997, the Bank had invested $0.2 in ARM mutual funds.
The value of the ARM mutual funds fluctuates with changes in the value
69
<PAGE>
of the underlying securities. However, the Bank believes that the risk
of loss on these securities is minimal given the type of securities
underlying the ARM mutual funds. The Bank maintains its securities in
two separate portfolios, a held-to-maturity portfolio, which consists
of securities purchased with the intent to hold to maturity and an
available-for-sale portfolio, which consist of securities held for
liquidity and asset/liability management purposes. Securities in the
held-to-maturity portfolio are accounted for on an amortized cost
basis and those in the available-for-sale portfolio are accounted for
on a market value basis with unrealized profits and losses affecting
stockholders' equity pursuant to SFAS 115. Such securities are liquid
and therefore they are categorized as available for sale. In 1995 the
Bank reclassified substantially all of its held-to-maturity portfolio
to the available-for-sale classification, allowing for active
management of more of the Bank's portfolio.
For information regarding the Bank's mortgage-backed securities
portfolio see "--Lending Activities--Mortgage-Backed Securities."
SECURITIES PORTFOLIO. The following table sets forth the
carrying value of First Financial's securities portfolio, including
FHLB stock, at the dates indicated. At December 31, 1997, the market
value of First Financial's securities portfolio, including FHLB stock
and certificates of deposit, was approximately $17.5 million.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Securities available for sale (at fair value)
U.S. Treasury notes $ 2,245 $ 502 $ 1,610
FHLB structured notes 477 458 3,990
Other government agency notes 8,073 3,074 3,315
FNMA common stock 68 45 37
AMF ARM Mutual Fund(1) 193 181 171
HBI Equity Trust(2) 191 269 129
Corporate debt securities 1,783 250 252
Commercial paper 1,477 -- --
Securities held to maturity (at amortized cost):
U.S. Treasury notes $ -- $ -- $ --
FHLB structured notes -- -- --
Other government agency structured notes -- -- --
Other government agency obligations -- -- --
Corporate debt securities -- -- --
Municipal securities -- 78 81
Certificates of deposit 2,099 -- 200
FHLB stock 910 1,148 481
------- -------- ------
Total investments $ 17,516 $ 6,005 $ 10,266
======== ======== ========
</TABLE>
____________________
(1) AMF ARM Mutual Fund is managed by Asset Management Fund for
Financial Institutions, Inc.
(2) HBI Equity Trust is managed by Howe Barnes Investments, Inc.
70
<PAGE>
SECURITIES PORTFOLIO MATURITIES
The following table sets forth the scheduled maturities,
amortized cost and market values and weighted average yields for the
Bank's investment portfolio and FHLB Stock at December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS BEYOND TEN YEARS
---------------- ----------------- ----------------- ----------------
Weighted Weighted Weighted Weighted
Market Average Market Average Market Average Market Average
Value Yield Value Yield Value Yield Value Yield
------ -------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available
for sale (at fair
value):
U.S. Treasury notes $ 2,245 5.79% $ -- -- $ -- -- $ - --
-
FHLB structured notes -- -- 477 4.55% -- -- -- --
Other government 3,199 5.68% 3,264 6.32% 402 6.02% 1,208 6.86%
agency
FNMA common stock -- -- -- -- -- -- -- --
AMF ARM Fund -- -- -- -- -- -- -- --
HBI Equity Trust -- -- -- -- -- -- -- --
Corporate debt 1,252 6.16% 531 6.25% -- -- -- --
securities<F1>
Commercial paper<F2> 1,477 5.91% -- -- -- -- -- --
----- ---- ---- ----
Total securities
available for sale 8,173 5.82% 4,272 6.11% 402 6.02% 1,208 6.86%
----- ----- --- -----
Securities held to
maturity (at amortized
cost):
Certificates of
deposit 1,999 6.15% 100 6.85% -- -- -- --
Total securities $ 10,172 $ 4,372 $ 402 $ 1,208
======== ======= ======= ========
</TABLE>
________________________
<F1> Includes corporate debt securities issued by U.S. Steel Corporation
($250,000 in book value and $250,000 in market value), Lehman
Brothers Corporation ($498,000 in book value and $499,000 in
market value), Lockheed Martin Corporation ($503,000 in book
value and $50 3,000 in market value) and Commonwealth Edison
Corporation ($531,000 in book value and $531,000 in market
value).
<F2> Includes commercial paper issued by Paine Webber Group ($988,000
in book value and $988,000 in market value) and AT&T Capital
($489,000 in book value and $490,000 in market value).
71
<PAGE>
<TABLE>
<CAPTION>
At December 31, 1997
----------------------------------------------------------------
Total Investment Securities
---------------------------------------------------------------
Average Life in Amortized Weighted
Years Cost Market Value Average Yield
--------------- --------- ------------ -------------
(Dollars in Thousands)
Securities available for
sale:
<S> <C> <C> <C> <C>
U.S. Treasury notes 0.68 $ 2,241 $ 2,245 5.79%
FHLB structured notes 2.28 500 477 4.55%
Other government agency 3.63 8,056 8,073 6.14%
FNMA common stock -- 4 68 --
AMF ARM Fund -- 193 193 5.86%
HBI Equity Trust -- 105 191 --
Corporate debt
securities(1) 1.20 1,782 1,783 6.18%
Commercial paper(2) 0.26 1,478 1,477 5.91%
------ -----
Total securities
available for sale 2.45(3) 14,359 14,507 6.01%(4)
----- ------ ------
Securities held to maturity
(amortized cost)
Certificates of deposit -- 2,099 2,099 6.13%
FHLB stock 910 910 7.00%
-- ------ -----
Total securities $17,368 $17,516
======= ========
</TABLE>
________________________
(1) Includes corporate debt securities issued by U.S. Steel
Corporation ($250,000 in book value and $250,000 in market
value), Lehman Brothers Corporation ($498,000 in book value
and $499,000 in market value), Lockheed Martin Corporation
($503,000 in book value and $50 3,000 in market value) and
Commonwealth Edison Corporation ($531,000 in book value and
$531,000 in market value).
(2) Includes commercial paper issued by Paine Webber Group
($988,000 in book value and $988,000 in market value) and
AT&T Capital ($489,000 in book value and $490,000 in market
value).
(3) Includes only U.S. Government and agency obligations and
structured notes; corporate and commercial paper; the AMF
ARM Mutual Fund is a daily investment deposit, FHLB Stock,
HBI Equity Trust, and FNMA Common Stock do not have fixed
maturities.
(4) The weighted average yield does not include the FNMA Common
Stock and HBI Equity Trust.
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Bank's funds for
investment and lending purposes. In addition to deposits, the Bank
derives funds from the amortization and prepayment of mortgage-backed
securities and loans, the maturity of securities, proceeds from the
sales of loans, operations and advances from the FHLB. Scheduled
principal repayments on mortgage-backed securities and loans are a
relatively stable source of funds, while deposit inflows and outflows
and loan prepayments are influenced significantly by general interest
rates and market conditions.
72
<PAGE>
DEPOSITS. The Bank offers a variety of deposit accounts having a
range of interest rates and terms. The Bank's deposits consist of
passbook savings, NOW, money market and certificate accounts. The Bank
also offers its depositors Individual Retirement Accounts ("IRAs").
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates
and competition. The overall amount of deposit accounts held by the
Bank, however, has not fluctuated significantly. The Bank's deposits
are obtained primarily from the areas in which its offices are
located. The Bank relies primarily on customer service and
long-standing relationships with customers to attract and retain these
deposits. Certificate accounts in excess of $100,000 are not actively
solicited by the Bank nor does the Bank use brokers to obtain
deposits. Further, the Bank developed strategies which focused on
pricing and retention in certain areas of the deposit base. Management
constantly monitors the Bank's deposit accounts, for activity, type of
account and total balances, competition rates, and the Bank's cost of
funds, adjusting accordingly. Based on historical experience,
management believes it will retain a large portion of such accounts
upon maturity.
DEPOSIT ACTIVITY. The following table sets forth the dollar
change in deposit accounts of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1997 1996 1995
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Deposits $ 296,079 $ 252,238 $ 130,730
Withdrawals 297,384 255,617 127,030
------- -------- --------
Net increase (decrease) before
interest credited (1,305) (3,379) 3,700
Interest credited 3,017 2,987 2,733
------ -------- --------
Net increase (decrease) in deposit
accounts $ 1,712 $ (392) $ 6,433
======== ======== ========
</TABLE>
73
<PAGE>
DEPOSIT FLOW. The following table sets forth the change in
dollar amount of deposit accounts in the various types offered by the
Bank between the dates indicated.
<TABLE>
<CAPTION>
Balance at % Balance at %
December of Total Increase December of Total Increase
31, 1997 Deposits (Decrease) 31 , 1996 Deposits (Decrease)
--------- -------- --------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Club accounts $ 26 0.04% $ (4) $ 30 0.05% --
Non-interest-bearing NOW 4,371 6.47 2,696 1,675 2.54 (458)
accounts. . . . . . . . . . . .
NOW accounts 4,826 7.14 (87) 4,913 7.46 (455)
Passbook accounts 8,739 12.94 (61) 8,800 13.37 (681)
Money market deposit accounts 6,760 10.01 (293) 7,053 10.71 (199)
Certificates of deposit which
mature:
within 12 months 20,058 29.69 (3,686) 23,744 36.06 (1,740)
within 12-36 months 22,251 32.94 12,686 9,565 14.53 2,523
beyond 36 months 519 0.77 (9,539) 10,058 15.28 618
------ ---- ------- ------ ----- -----
Total $67,550 100.00% $ 1,712 $ 65,838 100.00% $ (392)
======= ======= ====== ======== ======= ======
Balance
at % Balance at
December of Total Increase December
31, 1995 Deposits (Decrease) 31, 1994
-------- -------- ---------- ----------
Club accounts $ 30 0.05% $ -- $ 30
Non-interest-bearing NOW 2,133 3.22 580 1,553
accounts
NOW accounts 5,368 8.11 (23) 5,391
Passbook accounts 9,481 14.31 (1,717) 11,198
Money market deposit accounts 7,252 10.95 2,537 4,715
Certificates of deposit which
mature: 25,484 38.48 3,824 21,660
within 12 months 7,042 10.63 (3,193) 10,235
within 12-36 months 9,440 14.25 4,425 5,015
beyond 36 months ------ ---- ------ ------
Total $66,230 100.00% $ 6,433 $ 59,797
======= ======= ======= ========
</TABLE>
74
<PAGE>
DEPOSIT PORTFOLIO. Deposit accounts in the Bank as of December
31, 1997, were represented by the various types of deposit programs
described below.
<TABLE>
<CAPTION>
Weighted Percent
Average of Total
Interest Account Deposit
Rate Term Deposits Balance Accounts
-------- ---- -------- ------- --------
(In Thousands)
<S> <C> <C> <C> <C>
0.00% None Non-interest-bearing NOW accounts
$ 4,371 6.47%
1.00 None NOW accounts 4,826 7.14
1.75 None Passbook and club accounts(1) 8,765 12.98
4.21 None Money market deposit accounts 6,760 10.01
CERTIFICATE OF DEPOSIT(1)
--------------------------
4.72 1-5 months Fixed term, fixed-rate 453 0.67
4.61 6-11 months Fixed term, fixed-rate 6,201 9.18
5.14 12-17 months Fixed term, fixed-rate 4,599 6.80
5.00 18 months Fixed term, variable rate 119 0.18
4.16 18-23 months Fixed term, fixed-rate 40 0.06
4.59 24-29 months Fixed term, fixed-rate 310 0.46
4.61 30-35 months Fixed term, fixed-rate 2,163 3.20
6.02 36-47 months Fixed term, fixed-rate(3) 7,488 11.09
4.83 48-51 months Fixed term, fixed-rate 14 0.02
6.67 60 months Fixed term, fixed-rate 12,452 18.43
or greater
5.73 Various Negotiated Jumbo(3) 8,989 13.31
---- ----- -----
4.36%(2) $ 67,550 100.00%
==== ======== =======
</TABLE>
____________________________________
(1) IRA accounts are generally offered throughout all terms stated
above with a balance outstanding of $7.7 million.
(2) Includes the effect of non-interest-earning demand accounts
totalling $4.4 million.
(3) With respect to $8.0 million in deposit amounts, includes a
one-time option to increase rate within the 36 month term.
75
<PAGE>
CERTIFICATES OF DEPOSIT BY RATES. The following table sets forth
the certificates of deposit classified by rates as of the dates
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
3.99% or less $ 211 $ 3,274 $ 4,010
4.00% - 5.99% 25,593 24,084 17,149
6.00% - 7.99% 16,976 15,861 20,610
8.00% - 8.75% 48 148 197
-- --- ---
Total $ 42,828 $ 43,367 $ 41,966
========== ========= =========
</TABLE>
CERTIFICATES OF DEPOSIT MATURITY SCHEDULE. The following table
sets forth the amount and maturities of certificates of deposit at
December 31, 1997.
<TABLE>
<CAPTION>
AMOUNT DUE
-----------------------------------------------------------------------------------
FIVE OR
ONE YEAR 1-2 2-3 3-4 4-5 MORE
OR LESS YEARS YEARS YEARS YEARS YEARS TOTAL
-------- ------ ------ ----- ----- ------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Rate
3.99% or less $ 211 -- -- -- -- -- $ 211
4.00 - 5.99% 17,811 4,857 2,045 537 343 -- 25,593
6.00 - 7.99% 2,036 2,583 11,248 981 128 -- 16,976
8.00 - 8.75% -- -- -- -- 48 -- 48
------- ------- -------- ------- ------- ------ --------
Total $20,058 $ 7,440 $ 13,293 $ 1,518 $ 519 $ -- $ 42,828
======= ======= ======== ======= ======= ======= ========
</TABLE>
LARGE CERTIFICATES OF DEPOSIT. The following table indicates the
amount of the Bank's certificates of deposit of $100,000 or more by
time remaining to maturity at December 31, 1997.
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MATURITY PERIOD AMOUNT
(In Thousands)
Three months or less $ 2,643
Over three through six months 3,265
Over six through 12 months 300
Over 12 months 2,781
-----
Total $ 8,989
=======
____________________
(1) With respect to $8.0 million in deposit amounts, includes
one-time option to increase rate within the 36 month term.
Securities with a net amortized cost of $8.2 million were pledged
to secure certain deposit accounts in excess of federal deposit
insurance limits at December 31, 1997. Of the $9.0 million of large
certificates of deposit, $4.6 million are from one large municipal
depositor.
BORROWING. Deposits are the Bank's primary source of funds. The
Bank also obtains advances from the FHLB. Such advances are made
pursuant to several different credit programs, each of which has its
own interest rate, range of maturities and collateral requirements.
The maximum amount that the FHLB will advance to member institutions,
including the Bank, for purposes other than meeting withdrawals,
fluctuates from time to time in accordance with the policies of the
FHLB System and the Federal Housing Finance Board. The maximum amount
of FHLB advances to a member institution generally is reduced by
borrowing from any other source. At December 31, 1997, the Bank had
$6.7 million in advances from the FHLB.
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<PAGE>
FHLB ADVANCES. The following table sets forth certain information
regarding FHLB advances taken by the Bank during the periods
indicated.
<TABLE>
<CAPTION>
DURING THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Weighted average rate paid 6.03% 5.84% 6.24%
Maximum balance $ 21,450 $ 23,150 $ 3,500
Average balance(1) 12,515 13,746 503
</TABLE>
_____________________
(1) Calculated using average daily balances.
SUBSIDIARY ACTIVITIES. First Financial Services of Belvidere,
Illinois, Inc. ("FFSI"), a wholly owned subsidiary of the Bank,
administers and sells, on an agency basis, mortgage-related insurance
products such as mortgage life insurance, credit life insurance and
disability insurance. FFSI also sells on an agency basis a variety of
annuity products, principally to customers of the Bank. In May 1994,
FFSI hired additional staff to expand its sales of annuity and
insurance products in its market area. FFSI owns the full service
office at 1021 North State Street and leases this office to the Bank.
The Bank manages the operations of FFSI and receives $900 per month
for such management services.
At March 31, 1998, FFSI had $793,000 in total assets, $40,000 in
total liabilities and $753,000 in stockholders' equity. For the years
ended December 31, 1997, 1996 and 1995, FFSI had net income of $3,985,
$6,104 and $10,725, respectively. There has been no lending activity
between FFSI and the Bank for the years ended December 31, 1997, 1996
and 1995.
PERSONNEL. As of December 31, 1997, the Bank had 28 full-time
employees, 9 part-time employees and 3 full-time commissioned loan
originators. The employees are not represented by a collective
bargaining unit, and the Bank considers its relationship with its
employees to be good.
FEDERAL AND STATE TAXATION
GENERAL. First Financial and the Bank report their income on a
calendar year basis using the accrual method of accounting and are
subject to federal income taxation in the same manner as other
corporations with some exceptions, including particularly the Bank's
reserve for bad debts discussed below. The following discussion of tax
78
<PAGE>
matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to the Bank or
First Financial.
In August 1996, legislation was enacted that repeals the reserve
method of accounting used by many thrifts to calculate their bad debt
reserve for federal income tax purposes. As a result, the Bank is
required to recapture that portion of the reserve that exceeds the
amount which could have been deducted under the experience method for
post-1987 tax years, and now account for bad debts for federal income
tax purposes on the same basis as commercial banks. The recapture will
occur over a six-year period beginning in 1998 since the institution
meets certain residential lending requirements. The legislation did
not have a material impact on First Financial or the Bank.
To the extent earnings appropriated to a savings association's
bad debt reserves for "qualifying real property loans" and deducted
for federal income tax purposes exceed the allowable amounts of such
reserves computed under the experience method and to the extent of the
association's supplemental reserves for losses on loans (Excess), such
Excess may not, without adverse tax consequences, be utilized for the
payment of cash dividends or other distributions to a shareholder
(including distributions on redemption, dissolution, or liquidation)
or for any other purpose (except to absorb bad debt losses). As of
December 31, 1997, First Financial's Excess for tax purposes totaled
approximately $1.2 million.
CORPORATE ALTERNATIVE MINIMUM TAX. The Bank is subject to the
corporate alternative minimum tax ("AMT") which is imposed to the
extent it exceeds the Bank's regular income tax for the year. The
alternative minimum tax will be imposed at the rate of 20% of a
specially-computed tax base ("AMTI"). Included in the base will be a
number of preference items, including the following: interest on
certain tax-exempt bonds issued after August 7, 1986; and for years
beginning after, an amount equal to 75% of the amount by which the
savings institution's "adjusted current earnings" (as specially
defined) exceeds its taxable income with certain adjustments,
including the addition of preference items. In addition, for purposes
of the new alternative minimum tax, the amount of alternative minimum
taxable income that may be offset by net operating losses is limited
to 90% of alternative minimum taxable income. In addition, for taxable
years beginning after 1986, the Bank is subject to an environmental
tax equal to 0.12% of the excess of AMTI (with certain modifications)
over $2.0 million dollars.
STATE AND LOCAL TAXATION
First Financial and its subsidiaries currently file consolidated
Illinois income tax returns. For Illinois income tax purposes, a
savings institution's income is presently taxed at a rate of 7.3%. For
these purposes, "net income" generally means federal taxable income,
subject to certain adjustments (including the addition of interest
income on State and municipal obligations and the exclusion of
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<PAGE>
interest income on United States Treasury obligations). The exclusion
of income on United States Treasury obligations has the effect of
reducing significantly the Illinois taxable income of savings
institutions.
As a Delaware business corporation, First Financial (on an
unconsolidated basis) will be required to file annual returns and pay
annual fees and an annual franchise tax to the State of Delaware.
These taxes are based on the total authorized shares of First
Financial. First Financial currently has 1.75 million shares of stock
authorized (1.5 million shares of common stock and 250,000 shares of
preferred stock). The Delaware franchise tax for 1997 was
approximately $9,000.
First Financial also is subject to an annual franchise tax and
fees from the State of Illinois. These taxes are based on the total
shares issued. The total franchise tax paid by First Financial for the
year ended December 31, 1997 was approximately $4,000.
Neither First Financial nor the Bank has had an audit by the
Internal Revenue Service or the Illinois Department of Revenue within
the past five years, with the exception of a sales and usage tax audit
conducted by the Illinois Department of Revenue.
DESCRIPTION OF PROPERTY
The Bank conducts its business through three full service
offices. The Bank also maintains an administrative office for
accounting functions separate from its banking offices. The Bank
purchased land in 1996 for a future full service office.
<TABLE>
<CAPTION>
Net Book Value
of Property or
Originally Date of Leasehold
Leased or Acquired or Lease Improvements
Location Owned Leased Expiration at 12/31/97
-------- --------- ----------- ---------- -----------
(In Thousands)
<S> <C> <C> <C> <C>
Full Service Offices Owned 1965 -- $ 537
121 East Locust Street
Belvidere, Illinois 61008
1021 North State Street Leased(1) 1978 December 31, 346
Belvidere, Illinois 61008 1998<F1>
Full Service Office(2) Owned 1996 -- 952
7077 Perry Creek Parkway
Rockford, Illinois 61107
Administrative Office Leased 1991 October 26, 56
217 South State Street 1998
Belvidere, Illinois 61008
</TABLE>
_____________________
(1) Leased from FFSI, the Bank's wholly owned subsidiary.
(2) This facility was opened March 23, 1998.
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<PAGE>
INVESTMENT POLICIES. For a description of First Financial's and
the Bank's policies (all of which may be changed without a vote of
First Financial's security holders) and the limitations on the
percentage of assets which may be invested in any one investment, or
type of investment with respect to: (1) investments in real estate or
interests in real estate; (2) investments in real estate mortgages;
and (3) securities of or interests in persons primarily engaged in
real estate activities, reference is made hereunder to the information
presented above under "Business."
DESCRIPTION OF REAL ESTATE AND OPERATING DATA. Not Applicable;
the book value of each of First Financial's properties is less than
10% of First Financial's total consolidated assets at December 31,
1997.
LEGAL PROCEEDINGS
Neither First Financial nor the Bank are involved in any pending
legal proceedings other than routine legal proceedings occurring in
the ordinary course of business. Such proceedings in the aggregate are
believed by management to be immaterial to First Financial's financial
condition and results of operations.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
From its initial public offering on October 1, 1993 until March
16, 1998, First Financial traded on the NASDAQ Small Cap Market under
the symbol FFBI. More restrictive listing requirements implemented in
1998 required First Financial to delist from the Nasdaq Small Cap
Market. As of March 17, 1998, First Financial trades on the Over the
Counter Bulletin Board system under the symbol FFBI. The following
table sets forth the high and low sales price for the periods
indicated. These prices do not represent actual transactions and do
not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
1997 1996
------------------ -------------------
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $16.50 $15.50 $16.25 $15.50
Second Quarter 18.75 15.50 16.25 15.50
Third Quarter 19.50 18.13 16.13 15.50
Fourth Quarter 21.00 19.00 16.00 15.50
</TABLE>
At December 31, 1997, First Financial had 180 holders of record
of its common stock and, First Financial estimates, approximately 300
to 325 beneficial owners of its common stock. First Financial paid no
cash dividends on its common stock during 1997 and 1996.
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<PAGE>
REGULATION
GENERAL
First Federal is a federally chartered savings bank, the deposits
of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, First Federal is subject
to broad federal regulation and oversight extending to all its
operations. First Federal is a member of the FHLB of Chicago and is
subject to certain limited regulation by the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"). As the holding
company of the Bank, First Financial also is subject to federal
regulation and oversight. The purpose of the regulation of First
Financial and other holding companies is to protect subsidiary savings
institutions. The deposits of First Federal are insured by the FDIC
through Savings Association Insurance Fund ("SAIF"). As a result, the
FDIC has certain regulatory and examination authority over First
Federal.
PENDING FINANCIAL MODERNIZATION LEGISLATION
On May 13, 1998, the U.S. House of Representatives passed a
sweeping financial modernization bill, H.R. 10, "The Financial
Services Act of 1998", by a vote of 214 to 213. The bill was first
proposed by the Clinton Administration on May 21, 1997. The final
House version differs in many significant respects from the
Administration's proposed bill. The House bill has been sent to the
U.S. Senate for its consideration. The Senate began hearings on the
legislation on June 17, 1998. If passed by the Senate, the bill would
not become law unless it is signed by the President. As of the date
of its passage by the House, there were only 30 or so legislative days
left in the 105th Congress, which many observers believe is an
inadequate amount of time for the Senate to act on the legislation in
the 1998 legislative year. In addition, the Administration has
commented publicly that it will not support the legislation in the
form passed by the House. Accordingly, whether the bill will pass in
the near future remains uncertain and the ultimate form the
legislation might take if enacted cannot be predicted at this time.
The bill, among other things, addresses the ongoing debate
concerning mixing banking and commerce. Under the proposal, banks
could affiliate with insurance and securities companies in a holding
company structure, subject to functional regulation. Much of the
debate concerning the legislation has centered on whether non-banking
activities can be conducted through subsidiaries of the bank, rather
than only through holding companies. In this regard, H.R. 10 requires
banks to move non-banking activities to holding companies regulated by
the Board of Governors of the Federal Reserve System, thereby removing
them from under the bank. Securities activities would be regulated by
the Securities and Exchange Commission, and state regulators would
oversee insurance activities. The proposal provides for further study
of the issues relating to merging the SAIF and BIF. If adopted, the
legislation would represent the most significant overhaul of financial
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<PAGE>
services laws since the 1930s when the Glass-Steagall Act of 1933 was
enacted.
With respect to the thrift industry, H.R. does not contain
provisions eliminating the federal thrift charter and requiring all
federal thrifts to convert into national banks within two years. The
bill allows unitary thrift holding companies to continue operating,
but prevents any new unitary thrifts form being formed after March 31,
1998. Prior versions of the bill would have eliminated the federal
thrift charter, while allowing existing to unitary thrift holding
companies to retain their status and affiliations with nonfinancial
enterprises and to engage in all currently permissible activities.
Certain of these regulatory requirements and restrictions are
discussed below or elsewhere in this document.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS
The OTS has extensive authority over the operations of savings
institutions. As part of this authority, First Federal is required to
file periodic reports with the OTS and is subject to periodic
examinations by the OTS and the FDIC.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including First Financial.
This enforcement authority includes, among other things, the ability
to assess civil money penalties, to issue cease-and-desist or removal
orders and to initiate injunctive actions. In general, these
enforcement actions may be initiated for violations of law, including
unsafe or unsound practices.
In addition, the investment, lending and branching authority of
First Federal is prescribed by federal laws and it is prohibited from
engaging in any activities not permitted by such laws. For instance,
no savings institution may invest in non-investment grade corporate
debt securities. In addition, the permissible level of investment by
federal institutions in loans secured by non-residential real property
may not exceed 400% of total capital, except with approval of the OTS.
Federal savings institutions are also generally authorized to branch
nationwide.
The Bank's general permissible lending limit for
loans-to-one-borrower is equal to the greater of $500,000 or 15% of
unimpaired capital and surplus (except for loans fully secured by
certain readily marketable collateral, in which case this limit is
increased to 25% of unimpaired capital and surplus). At December 31,
1997, First Federal's lending limit under this restriction was $1.2
million. The Bank is in compliance with the loans-to-one-borrower
limit.
The OTS, as well as the other federal banking agencies, has
adopted guidelines establishing safety and soundness standards on such
matters as loan underwriting and documentation, internal controls and
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<PAGE>
audit systems, interest rate risk exposure and compensation and other
employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or
to comply with an approved plan may subject the institution to
enforcement action.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank's deposits are insured by the SAIF, which is
administered by the FDIC. Deposits are insured up to applicable limits
by the FDIC and such insurance is backed by the full faith and credit
of the U.S. Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the FDIC.
The FDIC also has the authority to initiate enforcement actions
against savings associations, after giving the OTS an opportunity to
take such action, and may terminate the deposit insurance if it
determines that the institution has engaged or is engaging in unsafe
or unsound practices, or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are
placed into one of nine categories and assessed insurance premiums
based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as "well capitalized" and
considered healthy would pay the lowest premium, while institutions
that are less than "adequately capitalized" and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions will be made by the FDIC
for each semi-annual assessment period.
REGULATORY CAPITAL REQUIREMENTS
Federally insured savings institutions, such as the Bank, are
required to maintain a minimum level of regulatory capital. The OTS
has established capital standards, including a tangible capital
requirement, a leverage ratio (or core capital) requirement and a
risk-based capital requirement applicable to such savings
institutions. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks.
The OTS is also authorized to impose capital requirements in excess of
these standards on individual institutions on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5%
of adjusted total assets (as defined by regulation). Tangible capital
generally includes common stockholders' equity and retained income,
and certain noncumulative perpetual preferred stock and related
income. In addition, all intangible assets, other than a limited
amount of purchased and originated mortgage servicing rights, must be
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<PAGE>
deducted from tangible capital for calculating compliance with the
requirement. At December 31, 1997, the Bank had $228,000 in mortgage
servicing rights which were considered intangible assets.
The OTS regulations establish special capitalization requirements
for savings institutions that own subsidiaries. In determining
compliance with the capital requirements, all subsidiaries engaged
solely in activities permissible for national banks or engaged in
certain other activities solely as agent for its customers are
"includable" subsidiaries that are consolidated for capital purposes
in proportion to the institution's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are
deducted from assets and capital.
At December 31, 1997, the Bank had tangible capital of $7.2
million, or 8.6% of adjusted total assets, which is approximately $6.0
million above the minimum requirement of 1.5% of adjusted total assets
in effect on that date.
The capital standards also require core capital equal to at least
3% of adjusted total assets. Core capital generally consists of
tangible capital plus certain intangible assets, including a limited
amount of purchased credit card relationships. As a result of the
prompt corrective action provisions discussed below, however, a
savings institution must maintain a core capital ratio of at least 4%
to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At December 31,
1997, First Federal had no intangibles which were subject to these
tests.
At December 31, 1997, First Federal had core capital equal to
$7.2 million, or 8.6% of adjusted total assets, which is $4.7 million
above the minimum leverage ratio requirement of 3% as in effect on
that date.
The OTS risk-based requirement requires savings institutions to
have total capital of at least 8% of risk-weighted assets. Total
capital consists of core capital, as defined above, and supplementary
capital. Supplementary capital consists of certain permanent and
maturing capital instruments that do not qualify as core capital and
general valuation loan and lease loss allowances up to a maximum of
1.25% of risk-weighted assets. Supplementary capital may be used to
satisfy the risk-based requirement only to the extent of core capital.
The OTS is also authorized to require a savings institution to
maintain an additional amount of total capital to account for
concentration of credit risk and the risk of non-traditional
activities. At December 31, 1997, First Federal had no capital
instruments that qualify as supplementary capital and $521,000 of
general loss reserves, which was less than 1.25% of risk-weighted
assets.
Certain exclusions from capital and assets are required to be
made for the purpose of calculating total capital. Such exclusions
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<PAGE>
consist of equity investments (as defined by regulation) and that
portion of land loans and nonresidential construction loans in excess
of an 80% loan-to-value ratio and reciprocal holdings of qualifying
capital instruments. The Bank had no such exclusions from capital and
assets at December 31, 1997.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a
risk weight, ranging from 0% to 100%, based on the risk inherent in
the type of asset. For example, the OTS has assigned a risk weight of
50% for prudently underwritten permanent one- to four-family first
lien mortgage loans not more than 90 days delinquent and having a loan
to value ratio of not more than 80% at origination unless insured to
such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
institution with more than normal interest rate risk exposure to
deduct from its total capital, for purposes of determining compliance
with such requirement, an amount equal to 50% of its interest-rate
risk exposure multiplied by the present value of its assets. This
exposure is a measure of the potential decline in the net portfolio
value of a savings institution, greater than 2% of the present value
of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline).
Net portfolio value is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. The rule provides
for a two quarter lag between calculating interest rate risk and
recognizing any deduction from capital.
On December 31, 1997, First Federal had total capital of $7.7
million (including $7.2 million in core capital) and risk-weighted
assets of $49.9 million (including $2.7 million in converted
off-balance sheet assets); or total capital of 15.4% of risk-weighted
assets. This amount was $3.7 million above the 8% requirement in
effect on that date.
The OTS and the FDIC are authorized and, under certain
circumstances required, to take certain actions against savings
institutions that fail to meet their capital requirements. The OTS is
generally required to take action to restrict the activities of an
"undercapitalized association" (generally defined to be one with less
than either a 4% core capital ratio, a 4% Tier 1 risk-based capital
ratio or an 8% risk-based capital ratio). Any such institution must
submit a capital restoration plan and until such plan is approved by
the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may
not make capital distributions. The OTS is authorized to impose the
additional restrictions that are applicable to significantly
undercapitalized institutions.
As a condition to the approval of the capital restoration plan,
any company controlling an undercapitalized institution must agree
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<PAGE>
that it will enter into a limited capital maintenance guarantee with
respect to the institution's achievement of its capital requirements.
Any savings institution that fails to comply with its capital
plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based
or core capital ratios of less than 3% or a risk-based capital ratio
of less than 6%) must be made subject to one or more of additional
specified actions and operating restrictions which may cover all
aspects of its operations and include a forced merger or acquisition
of the institution. An institution that becomes "critically
undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in
addition to those applicable to significantly undercapitalized
institutions. In addition, the OTS must appoint a receiver (or
conservator with the concurrence of the FDIC) for a savings
institution, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized institution
is also subject to the general enforcement authority of the OTS and
the FDIC, including the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an institution
into a lower capital category and impose the restrictions applicable
to such category if the institution is engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
First Federal may have a substantial adverse effect on the Bank's
operations and profitability. First Financial shareholders do not have
preemptive rights, and therefore, if First Financial is directed by
the OTS or the FDIC to issue additional shares of Common Stock, such
issuance may result in the dilution in the percentage of ownership of
First Financial.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
OTS regulations impose various restrictions or requirements on
institutions with respect to their ability to pay dividends or make
other distributions of capital. OTS regulations prohibit an
institution from declaring or paying any dividends or from
repurchasing any of its stock if, as a result, the regulatory capital
of the institution would be reduced below the amount required to be
maintained for the liquidation account established in connection with
its mutual to stock conversion.
The OTS utilizes a three-tiered approach to permit institutions,
based on their capital level and supervisory condition, to make
capital distributions which include dividends, stock redemptions or
repurchases, cash-out mergers and other transactions charged to the
capital account (see " Regulatory Capital Requirements").
Generally, Tier 1 institutions, which are institutions that
before and after the proposed distribution meet their fully phased-in
capital requirements, may make capital distributions during any
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<PAGE>
calendar year equal to the greater of 100% of net income for the
year-to-date plus 50% of the amount by which the lesser of the
institution's tangible, core or risk-based capital exceeds its fully
phased-in capital requirement for such capital component, as measured
at the beginning of the calendar year, or the amount authorized for a
Tier 2 association. However, a Tier 1 association deemed to be in need
of more than normal supervision by the OTS may be downgraded to a Tier
2 or Tier 3 association as a result of such a determination. The Bank
meets the requirements for a Tier 1 association and has not been
notified of a need for more than normal supervision. Tier 2
associations, which are associations that before and after the
proposed distribution meet their current minimum capital requirements,
may make capital distributions of up to 75% of net income over the
most recent four quarter period.
Tier 3 associations (which are institutions that do not meet
current minimum capital requirements) that propose to make any capital
distribution and Tier 2 associations that propose to make a capital
distribution in excess of the noted safe harbor level must obtain OTS
approval prior to making such distribution. Tier 2 associations
proposing to make a capital distribution within the safe harbor
provisions and Tier 1 associations proposing to make any capital
distribution need only submit written notice to the OTS 30 days prior
to such distribution. As a subsidiary of First Financial, the Bank
will also be required to give the OTS 30 days' notice prior to
declaring any dividend on its stock. The OTS may object to the
distribution during that 30-day period based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
On March 9, 1998, the issued a Notice of Proposed Rulemaking
that, if adopted in final form, would amend its capital distribution
regulation. The proposed rule updates, simplifies, and streamlines
the capital distribution regulation to reflect OTS's implementation of
the system of prompt corrective action established under FDICIA.
LIQUIDITY
The Bank is required to maintain an average daily balance of
liquid assets (e.g., cash, accrued interest on liquid assets, certain
time deposits, savings accounts, bankers' acceptances, specified
United States Government, state or federal agency obligations, shares
of certain mutual funds and certain corporate debt securities and
commercial paper) equal to not less than a specified percentage of
the average daily balance of its net withdrawal deposit accounts plus
short-term borrowings. This liquidity requirement may be changed from
time to time by the OTS to any amount within the range of 4 percent to
10 percent depending upon economic conditions and the savings flows of
member associations; this requirement is currently 4 percent. The OTS
requires that the average daily balance of liquid assets be determined
calculated using the amount of the institution's liquidity base as the
end of the preceding calendar quarter or the average daily balance of
its liquidity base during the preceding quarter The OTS may determine
the adequacy of an institution's liquidity on a case-by-case basis,
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<PAGE>
using as a standard that level of liquidity necessary to ensure that
the institution operates on a "safe and sound" basis. The OTS may
initiate enforcement actions for failure to meet these liquidity
requirements. At December 31, 1997, First Federal was in compliance
with these requirements, with an overall liquid asset ratio of 16.21%.
ACCOUNTING
An OTS policy statement applicable to all savings institutions
clarifies and re-emphasizes that the investment activities of a
savings institution must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in
accordance with GAAP. Under the policy statement, management must
support its classification of and accounting for loans and securities
(i.e., whether held for investment, sale or trading) with appropriate
documentation. First Federal is in compliance with these amended
rules.
The OTS has adopted an amendment to its accounting regulations,
which may be made more stringent than GAAP by the OTS, to require that
transactions be reported in a manner that best reflects their
underlying economic substance and inherent risk and that financial
reports must incorporate any other accounting regulations or orders
prescribed by the OTS.
QUALIFIED THRIFT LENDER TEST
In September 1996, the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 became law (the "Economic Growth Act of 1996").
In the past, savings associations were required to satisfy a qualified
thrift lender test ("QTL" test) by maintaining 65 percent of their
portfolio assets (defined as all assets minus intangible assets,
property used by the association in conducting its business and liquid
assets equal to 20% of total assets) in certain "qualified thrift
investments" (primarily residential mortgages and related investments,
including certain mortgage-backed securities) on a monthly basis in
nine out of every twelve months.
The Economic Growth Act of 1996 liberalized the QTL test for
savings associations by permitting them to satisfy a similar-but-
different 60 percent asset test under the Internal Revenue Code.
Alternatively, savings associations may meet the QTL test by
satisfying a more liberal 65 percent asset test that allows an
institution to include small business, credit card, agriculture and
education loans as qualified investments for purposes of the test.
Furthermore, consumer loans now count as qualified thrift investments
up to 20 percent of portfolio assets. On April 3, 1997, OTS issued a
final rule that implements provisions of the Economic Growth Act of
1996, including the amended QTL test.
If a federal savings association fails the QTL test, it must
convert to a bank or conform its activities to those permitted to a
national bank (but which activities also are not inconsistent with the
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powers permitted to a savings association), particularly as they
relate to investments, branching and dividends, and it also shall not
be eligible for new advances from any Federal Home Loan Bank. A
federal savings association that fails the QTL test may requalify. As
of December 31, 1997, the Bank maintained 73.7% of its portfolio
assets in qualified thrift investments and, therefore, met the QTL
test.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act (the "CRA"), as implemented
by OTS regulations, a savings institution has a continuing and
affirmative obligation, consistent with its safe and sound operation,
to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions, nor does
it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in
connection with its examination of a savings institution, to assess
the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain
applications by such institution. The CRA rating system identifies
four levels of performance that may describe an institution's record
of meeting community needs: outstanding, satisfactory, needs to
improve and substantial non-compliance. The CRA also requires all
institutions to make public disclosure of their CRA ratings. The CRA
regulations were recently revised. The OTS assesses the CRA
performance of a savings institution under lending, service and
investment tests, and based on such assessment, assigns an institution
in one of the four above-referenced ratings. The Bank received a
"satisfactory" CRA rating under the current CRA regulations in its
March 2, 1998 federal examination by the OTS.
TRANSACTIONS WITH AFFILIATES
Generally, transactions between a savings institution or its
subsidiaries and its affiliates are required to be on terms as
favorable to the institution as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an
affiliate, are restricted to a percentage of the institution's
capital. Affiliates of the Bank include First Financial and any
company which is under common control with the Bank. In addition, a
savings institution may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the
securities of most affiliates. The Bank's subsidiaries are not deemed
affiliates, however; the OTS has the discretion to treat subsidiaries
of savings institutions as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling
persons are also subject to conflict of interest regulations enforced
by the OTS. These conflict of interest regulations and other statutes
also impose restrictions on loans to such persons and their related
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interests. Among other things, such loans must be made on terms
substantially the same as for loans to unaffiliated individuals.
NEW THRIFT SUBSIDIARY AND EQUITY INVESTMENT RULES. On December
18, 1996, the OTS issued a final rule updating and streamlining its
regulations governing subsidiary and equity investments. The
regulation recasts operating subsidiaries and service corporations as
"subordinate organizations," revises the list of permissible
activities for service corporations, confirms federal preemption of
state law regarding the activities of operating subsidiaries and
clarifies the application process for establishing subordinate
organizations. The new rule also codifies the authority of a federal
savings association to invest in certain pass-through investments,
such as limited partnerships and mutual funds.
PROPOSED RULES GOVERNING FINANCIAL DERIVATIVES.
On April 23, 1998, the OTS published a Notice of Proposed
Rulemaking that, if adopted in final form, would apply to all
financial derivatives and would replace its regulations on forward
commitments, futures transactions, and financial options transactions.
The proposal would continue to permit a savings association to engage
in transactions involving financial derivatives to the extent that
these transactions are authorized under applicable law and are
otherwise safe and sound. In addition, the proposed rule would
describe the responsibilities of a savings association's board of
directors and management with respect to financial derivatives.
Comments on the proposal were due June 22, 1998. The rule defines a
financial derivative as a financial contract whose value depends on
the value of one or more underlying assets, indices, or reference
rates. The most common types of financial derivatives are futures,
forward commitments, options, and swaps. A mortgage derivative
security, such as a collateralized mortgage obligation or a real
estate mortgage investment conduit, is not a financial derivative
under the proposed rule. As of December 31, 1997, the Bank did not own
any financial derivatives as defined under the proposed rule.
HOLDING COMPANY REGULATION
First Financial is a unitary savings institution holding company
subject to regulatory oversight by the OTS. As such, First Financial
is required to register and file reports with the OTS and is subject
to regulation and examination by the OTS. In addition, the OTS has
enforcement authority over holding companies and their non-savings
institution subsidiaries which also permits the OTS to restrict or
prohibit activities that are determined to be a serious risk to the
subsidiary savings institution.
As a unitary savings institution holding company, First Financial
generally is not subject to activity restrictions. If First Financial
acquires control of another savings institution as a separate
subsidiary, it would become a multiple savings institution holding
company, and the activities of First Financial and any of its
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subsidiaries (other than the Bank or any other SAIF-insured savings
institution) would become subject to such restrictions unless such
other institutions each qualify as a QTL and were acquired in a
supervisory acquisition.
If First Federal fails the QTL test, First Financial must obtain
the approval of the OTS prior to continuing after such failure,
directly or through its other subsidiaries, any business activity
other than those approved for multiple savings institution holding
companies or their subsidiaries. In addition, within one year of such
failure First Financial must register as, and will become subject to,
the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings institution
holding company. See " Qualified Thrift Lender Test."
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against
their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At December 31, 1997, First Federal was in
compliance with these reserve requirements. The balances maintained to
meet the reserve requirements imposed by the Federal Reserve Board may
be used to satisfy liquidity requirements that may be imposed by the
OTS. See " Liquidity."
Savings institutions are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations
require institutions to exhaust other reasonable alternative sources
of funds, including FHLB borrowings, before borrowing from the Federal
Reserve Bank.
FEDERAL HOME LOAN BANK SYSTEM
First Federal is a member of the FHLB of Chicago, which is one of
12 regional FHLBs, that administers the home financing credit function
of savings institutions. Each FHLB serves as a reserve or central bank
for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance
with policies and procedures, established by the board of directors of
the FHLB, which are subject to the oversight of the Federal Housing
Finance Board. All advances from the FHLB are required to be fully
secured by sufficient collateral as determined by the FHLB. In
addition, all long-term advances are required to provide funds for
residential home financing.
As a member, First Federal is required to purchase and maintain
stock in the FHLB of Chicago. At December 31, 1997, First Federal had
$.9 million in FHLB stock, which was in compliance with this
requirement. In past years, First Federal has received substantial
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dividends on its FHLB stock. Over the past five fiscal years dividends
on FHLB stock have averaged 6.5% and were 6.8% for 1997.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low-
and moderately priced housing programs through direct loans or
interest subsidies on advances targeted for community investment and
low- and moderate-income housing projects. These contributions have
affected adversely the level of FHLB dividends paid and could continue
to do so in the future. These contributions could also have an adverse
effect on the value of FHLB stock in the future. A reduction in value
of First Federal's FHLB stock may result in a corresponding reduction
in First Federal's capital.
For the year ended December 31, 1997, dividends paid by the FHLB
of Chicago to the Bank totaled $66,000, which constitute a $9,000
increase from the amount of dividends received in 1996.
MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FOLLOWING DISCUSSION REVIEWS FIRST FINANCIAL'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND SHOULD BE READ IN CONJUNCTION
WITH THE CONSOLIDATED FINANCIAL STATEMENTS INCLUDED HEREIN.
GENERAL
First Financial completed its initial offering of common stock on
October 1, 1993, in connection with the simultaneous conversion of
First Federal Savings and Loan Association of Belvidere, a federally
chartered mutual savings and loan association to First Federal Savings
Bank (the "Bank"), a federally chartered stock savings bank.
First Financial is headquartered in Belvidere, Illinois, and its
principal business currently consists of the operations of its
wholly-owned subsidiary, First Federal Savings Bank. First Financial
had no operations prior to October 1, 1993, and accordingly the
results of operations prior to this date reflect only those of the
Bank and its subsidiary.
The Bank is a community-oriented savings bank offering
traditional deposit and loan products through its two full service
offices in Belvidere.
The Bank invests primarily in one-to four-family mortgage loans,
multi-family and commercial real estate loans, consumer loans, and
mortgage-backed securities, U.S. Government and federal agency
securities and other marketable securities. The Bank also originates
one-to four-family mortgage loans for sale, generally retaining the
servicing rights.
First Financial's results of operations are primarily dependent
on the Bank. The Bank's primary source of earnings is its net interest
income, which is the difference between interest income on
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interest-earning assets and interest expense on interest-bearing
liabilities. The results of operations are also affected by
non-interest income, such as mortgage loan servicing fees, charges on
deposit accounts, gains on sales of loans and sales of non-insured
deposit products, and non-interest expense, such as compensation and
benefits, occupancy and equipment, data processing, federal deposit
insurance premiums, loan origination and servicing, marketing
expenses, professional fees, and other operating expenses.
The Bank has a wholly-owned subsidiary, First Financial Services
of Belvidere Illinois, Inc., which offers annuities and insurance
products on an agency basis at the Bank's full service locations.
The following discussion reviews First Financial's financial
condition and results of operations and should be read in conjunction
with the Consolidated Financial Statements included in this filing.
FINANCIAL CONDITION AT MARCH 31, 1998
As of March 31, 1998, total assets of First Financial were $82.1
million, a decrease of $0.6 million, or 0.7%, from December 31, 1997
assets of $82.7 million.
Cash and cash equivalents totaled $3.1 million at March 31, 1998,
a decrease of $1.6 million, or 34.1% from December 31, 1997.
Securities held-to-maturity and available-for-sale totaled $17.5
million at March 31, 1998, an increase of $3.2 million, or 20.8% from
December 31, 1997.
Mortgage-backed securities totaled $2.6 million at March 31,
1998, an increase of $0.1 million from the December 31, 1997 total of
$2.5 million as purchases of $0.5 million more than offset principal
payments.
Net loans receivable totaled $50.1 million at March 31, 1998 as
compared to $52.1 million at December 31, 1997, a decrease of $2.0
million, or 3.9%. The quarter's favorable interest rate environment
allowed mortgage borrowers a significant opportunity to refinance
mortgage loans originated since early 1994. Much of the new
origination volume during the three months ended March 31, 1998 was in
the 15 to 30 year fixed rate mortgage product which First Financial
does not retain in portfolio. This resulted in the $1.0 million
decrease in total mortgage loans. An equivalent decrease in
non-mortgage loans was driven by repayments of short-term bridge loans
on real estate.
Premises and equipment increased $0.6 million or 32.6% to $2.5
million at March 31, 1998 from $1.9 million at December 31, 1997. The
increase was due to the investment in First Financial's new branch
facility in Rockford, Illinois, which opened for business March 23,
1998.
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Deposit accounts totaled $67.1 million at March 31, 1998 as
compared to $67.6 million at December 31, 1997, a decrease of $0.5
million, or 0.6%. In an effort to reduce funding costs, First
Financial was not as aggressive in the certificate of deposit market
and focused on transaction, money market and savings deposits. First
Financial was successful in reducing its cost of funds on deposit
liabilities 15 basis points to 4.29% for the three months ended March
31, 1998.
RESULTS OF OPERATIONS - COMPARISON OF THREE MONTHS ENDED MARCH 31,
1998 AND 1997.
GENERAL
Net income for the three months ended March 31, 1998 was $70,000
compared to $150,000 for the three months ended March 31, 1997, a
decrease of $80,000. Excluding after-tax securities gains of $46,000
during the 1997 period earnings decreased $34,000 from $104,000. The
decrease was driven by an increase in non-interest expense of $108,000
and a decrease in the net interest margin of $32,000, partially offset
by an increase in fee-based income of $25,000 and gains on sales of
loans of $58,000.
NET INTEREST INCOME
First Financial's net interest income before provision for loan
losses was $633,000 for the quarter ended March 31, 1998 as compared
to $665,000 for the quarter ended March 31, 1997, a decrease of
$32,000, or 4.8%. The decrease in net interest income in the 1998
period was due to the decrease in interest- earning assets as a result
the restructuring First Financial's balance sheet during the second
quarter of 1997. Interest income on interest-earning assets totaled
$1,462,000 for the three months ended March 31, 1998 as compared to
$1,680,000 for the same period in 1997, a decrease of $218,000 or
13.0%. Interest expense on interest-bearing liabilities totaled
$829,000 for the three months ended March 31, 1998, as compared to
$1,015,000 for the same period in 1997, a decrease of $186,000, or
18.4%. First Financial's net interest margin increased 22 basis
points to 3.04% for the three months ended March 31, 1998 from 2.82%
for the three months ended March 31, 1997. Much of the increase in
net interest margin was derived from a decrease in the cost of
interest bearing liabilities of 18 basis points.
PROVISION FOR LOAN LOSSES
The Bank's provision for loan losses was $24,000 for the three
months ended March 31, 1998 compared to $33,000 for the three months
ended March 31, 1997. The provision for the 1998 period primarily
resulted from current and projected growth in the loan portfolio as
well as continued diversification. The provision for the 1998 period
decreased due to the lower net portfolio growth assumptions as
compared to the 1997 period.
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NON-INTEREST INCOME
Non-interest income increased $12,000, or 6.6%, to $194,000 for
the three months ended March 31, 1998 from $182,000 for the same
period in 1997. Gains on sales of mortgage loans of $64,000
increased $58,000, or nearly eleven times the $6,000 total for the
same period in 1997. Additionally, other non-interest income
increased $30,000 for the three months ended March 31, 1998, or
230.8%, over the 1997 total of $13,000. Much of this increase was the
result of sales of investments products by the Bank's insurance and
brokerage subsidiary. The increases in these fee categories were
offset by the $71,000 decrease in gains on sales of securities. Fee
income from loans and deposits netted a decrease of $5,000 for the
three months ended March 31, 1998. Increased fee income on deposits
resulting from transaction accounts was offset by declines in loan
fees as refinancing activity during the quarter increased the levels
of servicing rights amortization.
NON-INTEREST EXPENSE
Non-interest expense increased $108,000, or 18.3%, to $699,000
for the three months ended March 31, 1998 from $591,000 for the three
months ended March 31, 1997. The increase was primarily the result of
increases in compensation and benefits as staffing levels increased to
support lending origination capacity and a new facility in Rockford.
Other expenses increased $33,000 for the three months ended March 31,
1998 from $108,000 for the three months ended March 31, 1997 as
postage and supplies increased with the opening of a new facility and
the adoption of a new logo for the bank. Additionally FDIC insurance
premiums increased as a rebate had been applied to the 1997 period
which resulted in lower premiums for that three month period. Loan
origination and servicing fees increased $21,000 to $33,000 for the
three months ended March 31, 1998 as mortgage loan originations
increased substantially resulting in increased commissions to loan
originators. Smaller increases in occupancy and equipment, with a new
facility, and professional services, were substantially offset by the
decrease in data processing expenditures as a result of the November
1997 data processing conversion First Financial undertook.
SECONDARY MORTGAGE MARKET LOAN ACTIVITY
Proceeds from the sales of first mortgage loans into the
secondary mortgage market totaled $8.0 million and $0.4 million during
the three months ended March 31, 1998 and 1997, respectively. The
increase was due to the favorable interest rate environment during the
1998 period and the effects of loan originators that had joined First
Financial after March 31, 1997. Gains on sales of mortgage loans, net
of a valuation allowance, for the three months ended March 31, 1998
also increased to $64,000 compared to $6,000 for the same period in
1997, an increase of nearly eleven-fold. The increase was volume
driven.
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INCOME TAXES
For the three months ended March 31, 1998 income tax expense
decreased $39,000 to $34,000 for the three months ended March 31, 1998
from $73,000 for the three months ended March 31, 1997, as net income
before income taxes decreased.
COMPARISON OF FINANCIAL CONDITION AND CHANGES IN FINANCIAL CONDITION
AT AND FOR THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
During the second quarter of 1997, First Financial took actions
to restructure its balance sheet for the purposes of reducing interest
rate risk, improving First Financial's net interest margin through the
redeployment of funds, and diversifying First Financial's balance
sheet. As a result of those actions, First Financial realized losses
totaling $286,000 net of taxes during the period. The restructuring
included the sale of substantially all of First Financial's fixed rate
one- to four-family mortgage loans and the majority of its
mortgage-backed securities and collateralized mortgage-backed
obligations. In addition, $7.5 million in fixed rate, fixed term FHLB
advances were prepaid.
At December 31, 1997, total assets of First Financial were $82.7
million as compared to $94.5 million at December 31, 1996, a decrease
of $11.8 million or 12.5%. Interest-earning deposits held in other
financial institutions increased $2.9 million to $4.1 million at
December 31, 1997 from $1.2 million at December 31, 1996. Securities
available for sale and held to maturity increased $9.6 million, or
198.7%, to $14.5 million at December 31, 1997 from $4.9 million at
December 31, 1996. The increase in available for sale securities was
the result of the balance sheet restructuring in which assets were
sold in the amount of $26.6 million, while FHLB advances in the amount
of $13.8 million were repaid throughout the course of 1997. The excess
proceeds were invested in short term securities and certificates of
deposit for future deployment in the loan portfolio. Mortgage-backed
securities available for sale and held to maturity decreased $7.7
million, or 75.6%, to $2.5 million at December 31, 1997. The primary
reason for the decrease was the sale of $7.0 million of
mortgage-backed securities in conjunction with restructuring the
balance sheet. First Financial held first mortgage loans for sale at
December 31, 1997 totaling $2.4 million compared to none at December
31, 1996. Net mortgage loan originations in the held for sale
portfolio were $12.2 million for the year ended December 31, 1997, as
compared to $6.5 million for the year ended December 31, 1996.
Proceeds from the sales of loans held for sale were $9.9 million for
the year ended December 31, 1997, as compared to $6.9 million for the
year ended December 31, 1996. The increases reflect the development of
a favorable rate environment during 1997 in addition to the resumption
of the sale of 15 year fixed rate mortgage loans.
Loans receivable decreased $21.7 million, or 29.4%, to $52.1
million at December 31, 1997, from $73.8 million at December 31, 1996.
The primary event driving this decrease was the aforementioned sale of
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a major portion of First Financial's fixed rate mortgage loan
portfolio. Fixed rate mortgage loans with a carrying value of $20.0
million were sold thereby reducing loans receivable substantially. In
addition, scheduled payments and prepayments on portfolio loans
accelerated in the low interest rate environment present during 1997.
As rates declined through the year, borrowers owning adjustable rate
and balloon loans sought to refinance into low fixed rate, fixed term
loan products.
Much of First Financial's remaining one- to four-family mortgage
portfolio consisted of loans of this nature. Partially offsetting the
decrease in mortgage loans, First Financial's consumer and commercial
loan holdings grew by $3.2 million, or 34.6%, during 1997, to $12.3
million. First Financial has been able to pursue its strategy of
diversifying the loan portfolio as a result of attracting lending
staff with experience in many areas of lending.
As First Financial has diversified into higher yielding lending
products such as consumer and commercial loans, non-performing assets
have increased to $825,000 at December 31, 1997 from $143,000 at
December 31, 1996. In addition to the higher concentration of
non-mortgage loans in the loan portfolio, First Financial streamlined
its review of non-performing and delinquent loans during 1997.
Generally, loans are considered non-accrual, and therefore
non-performing, at an earlier point in the delinquency cycle under the
new review process. Total non-performing assets represented 1.00% of
assets at December 31, 1997, as compared to 0.15% of assets at
December 31, 1996. The increase is the result of the portfolio
composition shift, the implementation of more stringent evaluation
criteria of delinquent loans during 1997 and a general acceptance of
bankruptcy by borrowers nationwide as evidenced by the record number
of filings in 1997. First Financial had no real estate owned at
December 31, 1997 and 1996.
Premises and equipment increased $0.5 million or 36.4% to $1.9
million at December 31, 1997 from $1.4 million at December 31, 1996.
The increase relates to the construction of First Financial's newest
full-service facility in Rockford, Illinois which is scheduled to open
in the Spring of 1998. The facility is First Financial's first de novo
branch since 1976.
Deposit accounts increased $1.8 million, or 2.7%, to $67.6
million at December 31, 1997, from $65.8 million at December 31, 1996.
Increases in non-interest-bearing deposits outpaced the decrease in
certificates of deposit during 1997. Certificates of deposit were
de-emphasized for the purpose of market share acquisition as First
Financial focused on the acquisition of demand deposits. First
Financial implemented a Totally Free Checking campaign in its market
during the first quarter of 1997 in an effort to recapture market
share and increase cross sales opportunities. At December 31, 1997,
advances from the FHLB of Chicago totaled $6.7 million compared to
$20.5 million outstanding at December 31, 1996. In addition to the
$7.5 million in advances repaid as a result of the balance sheet
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restructuring program, scheduled maturities of $6.3 million reduced
the outstanding advances.
Stockholders' equity totaled $7.6 million, or 9.23% of total
assets, at December 31, 1997, an increase of $0.3 million. Net income
of $0.1 million, increases in the market value of securities available
for sale of $0.2 million, the release of earned ESOP shares and the
amortization of stock benefit plans of $0.1 million were partially
offset by repurchases of treasury stock of $0.2 million as First
Financial repurchased an additional 9,727 shares of stock in the open
market during 1997.
RESULTS OF OPERATIONS-COMPARISON OF YEAR ENDED DECEMBER 31, 1997 - TO
YEAR-END DECEMBER 31, 1996
GENERAL
Net income for the year ended December 31, 1997 was $124,000, as
compared to a net loss of $158,000 for the year ended December 31,
1996. Exclusive of the aforementioned one time charges related to
restructuring First Financial's balance sheet and one time charges
related to First Financial's core processing vendor conversion of
$52,000 net of tax, net income would have been $462,000 for the year
ended December 31, 1997. One time charges in 1996 related to the
disposition of low yielding securities and the Federal Deposit
Insurance Corporation's Savings Association Insurance Fund ("FDIC
SAIF") assessment, which totaled $551,000. After adjusting for these
non-recurring events, earnings for the year ended December 31, 1997
increased 17.6% to $462,000 from $393,000 for the year ended December
31, 1996.
INTEREST INCOME. Total interest income decreased $0.1 million or
1.0%, to $6.3 million for the year ended December 31, 1997, from $6.4
million for the year ended December 31, 1996. A decrease in average
earning assets of $3.2 million, or 3.7%, to $84.9 million for the year
ended December 31, 1997 from $88.1 million for the year ended December
31, 1996 was partially offset by a 21 basis point increase in the
yield on earning assets to 7.47% for the year ended December 31, 1997
from 7.26% for the year ended December 31, 1996. Yield increases were
the result of several factors including: i.) the diversification in
the loan portfolio from mortgages to higher yielding consumer and
commercial loans; ii.) the reinvestment of securities sales proceeds
from 1996 into fixed rate securities with higher coupons than the
disposed adjustable rate securities; and iii.) teaser rates expiring
on the credit card portfolio in the first quarter of 1997. The volume
driven decrease in total interest income was most notable in first
mortgage loans where average balances decreased $6.8 million to $53.0
million primarily as the result of the sale of $20.0 million in fixed
rate mortgage loans as a component of restructuring the balance sheet.
First Financial also recorded a significant volume-driven decrease in
interest income as much of First Financial's mortgage-backed
securities holdings were liquidated in conjunction with the
restructuring. The loan portfolio continued its pattern of
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diversification at an accelerated pace in 1997 as significant
mortgage-related holdings were divested and personnel with diversified
lending backgrounds were added. As a result, interest income on first
mortgage loans decreased $453,000 while interest income on other loans
increased $298,000.
INTEREST EXPENSE. Total interest expense for the year ended
December 31, 1997 remained unchanged at $3.8 million. A decrease in
interest on FHLB advances and savings accounts was partially offset by
an increase in interest on certificates of deposit. The decrease in
interest on FHLB advances for the year ended December 31, 1997 was the
result of lower average balances as $7.5 million in FHLB advances were
repaid during the balance sheet restructuring. The decrease in
interest expense on savings accounts was the result of a 25 basis
point reduction in rates at the beginning of 1997 as market conditions
were favorable for this pricing structure. Partially offsetting the
aforementioned decreases was an increase in the interest expense on
certificates of deposit of $64,000 primarily as a result of higher
average balances.
NET INTEREST INCOME. First Financial's net interest income before
provision for loss on loans was $2.6 million for the year ended
December 31, 1997, unchanged from December 31, 1996. Effectively,
volume driven decreases were substantially offset by yield/cost driven
increases. First Financial's net interest spread increased 10 basis
points to 2.61% for the year ended December 31, 1997 from 2.51% for
the same period in 1996. Additionally First Financial's net interest
margin increased 6 basis points to 3.05% for the year ended December
31, 1997 from 2.99% for the year ended December 31, 1996.
PROVISION FOR LOSS ON LOANS. First Financial recorded a provision
for loss on loans of $88,000 for the year ended December 31, 1997, a
decrease of $94,000, or 51.6%, from $182,000 for the year ended
December 31, 1996. Much of the 1996 provision was driven by First
Financial's diversification into credit card lending. During 1997,
provisions for losses on credit card receivables were reduced as
average outstanding receivables decreased and chargeoffs registered
less than 0.25% of average balances for the year.
NON-INTEREST INCOME. Non-interest income increased $199,000, or
216.3%, to $291,000 for the year ended December 31, 1997, from $92,000
for the year ended December 31, 1996. Exclusive of non-recurring
losses on sales of securities of $240,000 and $415,000 during 1997 and
1996, respectively, and non-recurring losses on sales of loans in 1997
of $157,000, non-interest income increased $181,000 or 35.7%. Losses
on sales of securities and loans during 1997 were the result of the
aforementioned balance sheet restructuring plan while the 1996
securities losses were the result of the sale of dual index floating
rate agency notes purchased in 1993. The $181,000 recurring
non-interest income increase was primarily the result of the gain on
the maturity of a unit investment trust of $69,000, the increase in
gains on sales of loans of $46,000 and a $35,000 increase in fees on
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deposit accounts as the Totally Free Checking program increased fee
income opportunities.
NON-INTEREST EXPENSE. Non-interest expense decreased $0.2
million, or 6.7%, to $2.6 million for the year ended December 31,
1997, from $2.8 million for the year ended December 31, 1996.
Exclusive of the $417,000 FDIC SAIF assessment in 1996, and core data
processing conversion charges of $79,000 in 1997, non-interest expense
increased $0.1 million, or 6.3%. Among the increases in non-interest
expense were compensation and benefits increases of $153,000 as a
result of year over year staffing level increases and mortgage loan
origination activity, increases in other expenses of $87,000 relating
to prepayment of FHLB advances, operational costs of increased
transaction account volumes and the deployment of automated teller
machines, a $45,000 increase in marketing and promotion driven by
direct mail marketing campaigns and a $44,000 increase in occupancy
and equipment as First Financial's commitment to technological
improvements continued in 1997. Partially offsetting some of the
aforementioned increases in non-interest expense was a $123,000
decrease in federal deposit insurance premiums as the FDIC SAIF was
recapitalized in 1996 and assessment rates were subsequently reduced
as well as $71,000 decrease in loan origination and servicing
primarily as commissions paid on loans originated declined due to the
volume decreases from 1996 to 1997.
INCOME TAXES. For the year ended December 31, 1997, income tax
expense was $48,000 compared to an income tax benefit of $102,000 for
the year ended December 31, 1996. The increase from 1996 to 1997 in
income tax provision resulted from the increase in net income before
taxes of $432,000, to $172,000 for the year ended December 31, 1997,
from ($260,000) for the year ended December 31, 1996.
YEAR 2000. In 1997, First Financial began the process of
assessing its data processing systems' abilities to adequately handle
date sensitive information leading up to and following January 1,
2000. Financial institutions, such as First Financial, are
particularly affected by the ability of computers and software to read
dates properly. Little internal programming outside of off-the-shelf
word processing and spreadsheet documents is undertaken internally by
First Financial. However, First Financial is heavily reliant upon its
data processing service bureau and other vendors of ancillary systems
to achieve compliance with their various products. First Financial's
exposure from commercial customers is limited due to the small base of
commercial borrowers First Financial currently serves. With regard to
systems compliance, First Financial has identified and contacted the
vendors it deals with to determine the status of their product's
compliance or schedule to achieve compliance. Management has
designated a committee to track the progress of year 2000 compliance
of vendors and to identify those products that may need to be replaced
in the event the vendor falls behind their remediation schedule or
notifies First Financial of the intent not to make the product
compliant. The Board of Directors is updated on a quarterly basis of
the status of the committee and the project. Based on responses
101
<PAGE>
received to date, First Financial believes that its vendors are
actively addressing the year 2000 problem. Testing of systems and
hardware compliance is expected to be performed by current staff and
costs associated with replacement of software and hardware are not
expected to have a material impact on First Financial's financial
position or its results of operations.
RECENT ACCOUNTING DEVELOPMENTS
NEW ACCOUNTING STANDARDS. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130
establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a
full set of general-purpose financial statements. It requires that all
items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS No.
131). SFAS No. 131 requires that public business enterprises report
financial and descriptive information about reportable operating
segments and report selected information about operating segments in
interim financial reports issued to shareholders. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years
is to be restated.
REGULATORY CAPITAL REQUIREMENTS
At March 31, 1998, the Bank was in compliance with the
capital requirements, summarized as follows:
<TABLE>
<CAPTION>
Regulatory
Capital
Requirement Actual Capital Excess Capital
% Amount % Amount % Amount
-- ----------- ------- ------- ----- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible(1) 1.50% $1,236 8.83% $7,269 7.33% $6,033
Core(1) 3.00 2,471 8.83 7,269 5.83 4,477
Risk-Based(2) 8.00 3,879 16.03 7,771 8.03 3,892
Current
</TABLE>
Total assets for regulatory purposes $82,368
Total risk-weighted assets $48,484
(1) Percentages represent percent of total assets for
regulatory purposes.
(2) Percentages represent percent of total risk weighted assets.
102
<PAGE>
At March 31, 1998, the difference between stockholder's equity
in accordance with generally accepted accounting principles (GAAP) and
regulatory capital are summarized as follows:
(In Thousands)
GAAP capital $ 7,281
Net unrealized gain on securities (12)
available-for-sale -----
Capital for regulatory purposes 7,269
General loan loss allowances 512
Originated mortgage servicing rights (10)
fair value ----
Risk-based capital $ 7,771
=======
LIQUIDITY AND CAPITAL RESOURCES
First Financial's primary sources of funds are deposits,
principal and interest payments on loans and mortgage-backed
securities, custodial account balances held for borrowers of serviced
loans and advances from the Federal Home Loan Bank of Chicago
("FHLB-Chicago"). While maturities and scheduled amortization of
loans and mortgage-backed securities are predictable sources of funds,
deposit flows and mortgage prepayments are greatly influenced by
general interest rates, economic conditions, and competition.
The Bank is required to maintain minimum levels of liquid assets
as defined by OTS regulations. This requirement, which may be varied
at the direction of the OTS depending upon economic conditions and
deposit flows, is based upon a percentage of the balance of net
deposits and short term borrowing. The required ratio is currently
4.0%. The Bank's liquidity ratio was 14.5% at March 31, 1998. The
Bank's relatively high ratio as of March 31, 1998 is primarily the
result of the net cash and short term securities acquired after the
balance sheet restructuring undertaken in the second quarter of 1997.
First Financial's most liquid assets are cash and cash
equivalents, which include investments in highly liquid, short-term
investments. The levels of these assets are dependent on First
Financial's operating, financing, lending, and investing activities
during any given period. At March 31, 1998, cash and cash equivalents
totaled $3.1 million as compared to $4.8 million at December 31, 1997.
First Financial's cash flows are comprised of three
classifications: cash flows from operating activities, cash flows
from investing activities, and cash flows from financing activities.
Cash flows used in operating activities for the three months ended
March 31, 1998, consisted primarily of origination of mortgage loans
held for sale of $8.9 million offset by sales of such loans of $8.3
million. Cash flows provided by operating activities for the three
months ended March 31, 1997 consisted primarily of sales of mortgage
103
<PAGE>
loans of $0.4 million offset by the origination of mortgage loans held
for sale of $0.4 million.
Cash flows used in investing activities for the three months
ended March 31, 1998 consisted primarily of purchases of loan
participations, certificates of deposit, securities and mortgage-
backed securities available for sale of $7.1 million offset by
maturities, calls, and sales of investment securities of $4.4 million,
net principal collections on portfolio loans of $2.4 million and
principal repayments on mortgage-backed securities of $0.3 million.
Also contributing to the funds usage in investing activities was the
$0.7 million in fixed asset purchases primarily stemming from the
completion of First Financial's newest facility in Rockford, Illinois.
Cash flows provided by investing activities for the three months ended
March 31, 1997 consisted primarily of: i.) $1.2 million in principal
collected on portfolio loans, net of originations; ii.) maturities,
calls and redemptions of securities available for sale of $0.5 million
and; iii.) principal collected on mortgage-backed securities of $0.2
million partially offset by the purchase of $0.5 million of
securities available for sale.
Cash flows used in financing activities for the three months
ended March 31, 1998 consisted of net repayments of borrowing from the
FHLB Chicago of $0.4 million and a decrease in deposit accounts of
$0.4 million partially offset by a net increase in advanced payments
for taxes and insurance of $0.1 million. Deposit outflows represent
the net activity between decreased certificate account balances and
increased demand deposits and savings deposits. Cash flows used in
financing activities for the three months ended March 31, 1997
consisted of net repayments on borrowing from the FHLB Chicago of $3.5
million, partially offset by $2.0 million in inflows to deposit
accounts as First Financial was more effectively able to compete in
the local deposit market with reduced FDIC insurance premiums and a
net increase in advanced payments for taxes and insurance of $0.2
million.
At March 31, 1998, the Bank had outstanding loan commitments of
$0.6 million. The Bank anticipates that it will have the resources
available to meet its current loan origination and purchase
commitments. Certificates of deposit which are scheduled to mature in
less than one year from March 31, 1998 totaled $19.8 million.
Management believes that a significant portion of such deposits will
remain with First Financial.
ASSET/LIABILITY MANAGEMENT
First Financial manages its assets and liabilities to control the
impact of changing interest rates on its net interest margin and the
level of interest rate risk within First Financial's asset and
liability structure. First Financial assesses interest rate risk
internally by measuring the impact positive and negative interest rate
shocks will have on both the net portfolio value and the projected net
104
<PAGE>
interest income. The net portfolio value is calculated by computing
the net present value of the cash flows associated with its interest
earning-assets and interest-bearing liabilities. Assumptions are made
regarding the prepayment rates of assets and the decay rates of
liabilities based on factors including First Financial's historical
experience, the current interest rate environment, embedded options
within the assets and liabilities and industry estimates produced by
major broker/dealers and regulatory authorities. Management believes
the assumptions reasonably represent the anticipated amortization,
maturities and rate adjustments of the underlying assets. Decay rates
of deposits are similarly believed to reasonably represent the
anticipated attrition within those products. Although the assumptions
regarding asset and liability prepayments and decay rates are believed
to be reasonable, actual results may vary substantially due to factors
beyond First Financial's control.
During 1997, First Financial attempted to reduce interest rate
risk by: i) selling most of First Financial's fixed rate mortgage loan
portfolio and reinvesting the proceeds in short term liquid
securities; ii) originating for portfolio, ARM loans, shorter term
fixed-rate loans and consumer loans and commercial loans; iii)
originating long-term fixed rate loans for sale into the secondary
mortgage market; and iv) investing in other rate sensitive assets.
The holding company does not have rate sensitive assets or
liabilities sufficient to materially impact the measurement of
interest rate risk therefore interest rate risk is measured at the
subsidiary level. The following table sets forth First Financial's
subsidiary Bank's and earnings at risk as of December 31, 1997
(dollars in thousands):
[CAPTION]
<TABLE>
Change in Net Portfolio Value Net Interest Income
Interest Rates ----------------------------------- ----------------------------------
(basis points) $ Amount $ Change % Change $ Amount $ Change % Change
----------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
+400 6,243 (1,484) (19.2%) 2,796 131 4.9%
+300 6,703 (1,024) (15.3) 2,776 111 4.2
+200 7,138 (589) (8.3) 2,755 90 3.3
+100 7,478 (249) (3.3) 2,720 55 2.1
0 7,727 -- -- 2,665 -- --
-100 7,925 198 2.6 2,607 (58) (2.2)
-200 8,240 315 4.1 2,541 (124) (4.9)
-300 7,666 (61) (0.8) 2,401 (264) (9.9)
-400 7,222 (505) (6.5) 2,237 (428) (16.1)
</TABLE>
105
<PAGE>
ASSET QUALITY
The following table sets forth information regarding loans
delinquent more than 90 days, non-performing less than 90 days and
real estate owned.
<TABLE>
<CAPTION>
At
March At December
31, 1998 31, 1997
-------- -----------
(Dollars in Thousands)
<S> <C> <C>
Loans delinquent 90 days or more accruing:
Total $ - $ -
Non-accruing:
First mortgage loans
1-4 family residential 90 7
Other mortgage loans 147 -
Other loans 53 34
-- --
Total 290 41
Loans delinquent 89 days or less
First mortgage loans
1-4 family residential first mortgage loans 466 380
Other mortgage loans - 289
Other loans 135 115
--- ---
Total 601 784
---- ----
Total non-performing loans $ 891 $ 825
Total real estate owned, net of related allowances for losses -- --
---- ----
Total non-performing assets $ 891 $ 825
=== ===
Total non-performing loans to net loans receivable (1 1.68% 1.51%
Total non-performing loans to total assets 1.09 1.00
Total non-performing loans and REO to total assets 1.09 1.00
</TABLE>
(1) Net loans receivable includes loans held for sale.
The consumer loan portfolio accounted for 59.1%, or $39,000, of
the increase in non-performing loans as non-performing credit card and
home equity lines of credit increased through the first quarter of
1998 as the portfolios continued to season. The remaining 40.9% of
the increase in non-performing loans, or $27,000, came from the
mortgage portfolio. These loans, constituting the majority of the
non-performing loans, have a weighted average loan to value of 60.9%,
and private mortgage insurance coverage on those loans exceeding an
80.0% loan to value thereby minimizing First Financial's exposure to
losses.
An allowance for loan losses is maintained at a level considered
by management to be adequate to absorb future loan losses. Management
of the Bank, in determining the provision for loan losses, considers
the risks inherent in its portfolio and changes in the nature and
volume of its loan activities, along with general economic conditions.
106
<PAGE>
The Bank maintains a loan review system which allows for a periodic
review of its loan portfolio and the early identification of potential
problem loans. Such system takes into consideration, among other
things, delinquency status, size of loans, type of collateral and
financial condition of the borrowers. During the second quarter of
1997 management implemented a loan classification system with
moderately tighter standards than previously utilized. The
delinquencies have been and are expected to remain relatively stable,
and management believes that the provision balance at March 31, 1998
is both adequate to absorb any future losses if the real estate market
experienced any weaknesses or if the local economy were to experience
a recessionary period, and is representative of a conservative
approach. Although the Bank maintains its allowance for losses on
loans at a level which it considers to be adequate to provide for
potential losses, there can be no assurance that such losses will not
exceed the estimated amounts or that the Bank will not be required to
make additions to the allowance for losses on loans in the future.
Future additions to the Bank's allowance for loan losses and any
changes in the related ratio of the allowance for loan losses to
non-performing loans are dependent upon the economy, changes in real
estate values and interest rates, and inflation.
The allowance for loan loss was $542,000 at March 31, 1998, which
represented 61.0% of non-performing loans and non-performing assets.
These ratios compare to 64.4% of non-performing loans and
non-performing assets at December 31, 1997.
Loan impairment is reported when full payment under the loan term
is not expected. Impairment is evaluated in total for smaller-
balance loans of a similar nature such as First Financial's consumer
and credit card loans and on an individual loan basis for other loans.
If a loan is impaired, a portion of the allowance is allocated so that
the loan is reported, net, at the present value of estimated future
cash flows using the loan's existing rate, or the loan's market price
or the fair value of the collateral, if the loan is collateral
dependent. Loans are evaluated for impairment when payments are
delayed, typically 90 days or more, or when the internal grading
system indicates a doubtful classification.
107
<PAGE>
RATE/VOLUME ANALYSIS
The following table sets forth certain information relating to
First Financial's changes in interest income and interest expense for
the periods indicated. For each category of interest-earning assets
and interest-bearing liabilities, information is provided on changes
attributable to (i) changes in average volume (changes in average
volume multiplied by old rate); (ii) changes in rates (changes in rate
multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume); and (iv)
the net change.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 vs. 1996
-------------------------------------------------------
Total
Rate/ Increase
Volume Rate Volume (Decrease)
------ ---- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Interest-earning assets:
First mortgage loans(1) $ (519) $ 74 $ (8) $ (453)
Other loans 221 59 18 298
Securities(2) 178 27 11 216
Mortgage-backed securities (250) (5) 3 (252)
Interest-earning deposits 51 34 42 127
-------- -------- ------ -------
Total interest-earning assets $ (319) $ 189 $ 66 $ (64)
======== ======== ======= ========
Interest-bearing liabilities:
Passbook accounts $ (7) $ (23) $ -- $ (30)
Certificate accounts 52 12 -- 64
NOW and MMDA accounts (9) 6 1 (2)
FHLB advances (130) 97 (15) (48)
-------- ------- ------- -------
Total interest-bearing liabilities (94) 92 (14) (16)
-------- -------- ------- -------
Net change in interest income $ (225) $ 97 $ 80 $ (48)
========== ========= ======== ==========
</TABLE>
___________________
(1) Calculated net of deferred loan fees, loan discounts, loans
in process, and loan loss reserves, and includes loans held
for sale.
(2) Includes securities available for sale, investment securities
held to maturity, and FHLB stock.
(3) Includes interest earned on Federal Home Loan Bank daily
investment deposit and certificates of deposit in other
financial institutions.
108
<PAGE>
AVERAGE BALANCE SHEETS
The following table sets forth certain information relating
to First Financial's average balance sheets and reflects the average
yield on assets and the average cost of liabilities for the periods
indicated. Average balances are derived from average daily balances
for 1997 and average month end balances for 1996. Management does not
believe that the use of average monthly balances for 1996 instead of
average daily balances has caused any material differences in the
information presented. The yields and costs include fees that are
considered adjustments to yields. No tax equivalent adjustments were
made. Non-accrual loans have been included in the tables as loans
carrying a zero-yield.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1997 1996
--------------------------- -------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- -------- -------- -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
First mortgage loan(1) $52,960 $4,095 7.73% $ 59,777 $ 4,548 7.61%
Other loans 10,322 996 9.65% 7,844 698 8.90%
Securities(2) 11,687 711 6.09% 8,605 496 5.77%
Mortgage-backed
securities 6,128 368 6.00% 10,252 620 6.05%
Interest-earning
deposits(3) 3,759 168 4.48% 1,670 41 2.46%
------- ------ ------- ------
Total interest-earning 84,856 6,338 7.47% 88,148 6,403 7.26%
assets ------ ------
Non-interest earning 3,405 2,761
assets ------ -------
Total assets $ 88,261 $ 90,909
======= ======
Liabilities and Stockholders'
Equity:
Interest-bearing $ 8,966 157 1.75% $ 9,332 187 2.00%
liabilities: 43,476 2,490 5.73% 42,564 2,426 5.70%
Passbook accounts 12,219 350 2.86% 12,526 352 2.82%
Certificate accounts 12,515 754 6.03% 14,934 802 5.37%
NOW and MMDA accounts ------- ----- ------ -----
FHLB advances
Total interest-bearing 77,176 3,751 4.86% 79,356 3,767 4.75%
liabilities -------- --------
Non-interest-bearing deposit 2,520 2,563
accounts 1,041 1,236
Non-interest-bearing ------- ------
liabilities
Total liabilities 80,737 83,155
Stockholders' equity 7,524 7,754
------- ------
Total liabilities and
stockholders' equity $ 88,261 $
======== 90,909
=======
109
<PAGE>
Net interest income/interest
rate spread(4) $ 2,587 2.61% $ 2,636 2.51%
======= ===== ======== =====
Net interest-earning assets/
net interest margin(5) $ 7,680 $ 8,792
======= =======
Ratio of average 3.05% 2.99%
interest-earning assets to ===== =====
average interest-bearing
liabilities 1.10x 1.11x
====== =======
</TABLE>
_________________________
(1) Calculated net of deferred loan fees, loan discounts, loans
in process, and loan loss reserves, and includes loans held
for sale.
(2) Includes securities available for sale, investment securities
held to maturity, and FHLB stock.
(3) Includes interest earned on Federal Home Loan Bank daily
investment deposit and certificates of deposit in other
financial institutions.
(4) Interest rate spread represents the difference between the
average yield on total interest-earning assets and the
average cost of total interest-bearing liabilities.
(5) Net interest margin represents net interest income as a
percentage of average interest-earning assets.
OTHER MATTERS
As of the date of this Proxy Statement, the First Financial Board
is not aware of any matters other than those described in this Proxy
Statement which will be presented for action at the Special Meeting.
If other matters are presented, proxies will be voted in accordance
with the best judgment of the proxy holders.
110
<PAGE>
FINANCIAL STATEMENTS
FIRST FINANCIAL BANCORP, INC.
Belvidere, Illinois
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
CONTENTS
REPORT OF INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . F-2
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION . . . . . . . F-3
CONSOLIDATED STATEMENTS OF INCOME . . . . . . . . . . . . . F-4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY . . . . . . F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS . . . . . . . . . . . F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . F-8
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
First Financial Bancorp, Inc.
Belvidere, Illinois
We have audited the accompanying consolidated statements of financial
condition of First Financial Bancorp, Inc. as of December 31, 1997,
and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the years in the two-year period
ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of First Financial Bancorp, Inc. at December 31, 1997, and the results
of its operations and its cash flows for each of the years in the
two-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
January 22, 1998
F-2
<PAGE>
FIRST FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31, 1997
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash on hand and non-interest-earning deposits $ 629
Interest-earning deposits 4,130
-----------
Total cash and cash equivalents 4,759
Securities available-for-sale 14,507
Mortgage-backed securities available-for-sale 1,625
First mortgage loans held for sale 2,352
Mortgage-backed securities held-to-maturity (fair value $835) 864
Certificates of deposit 2,099
Loans receivable, net of allowance for losses of $531 52,120
Accrued interest receivable 526
Premises and equipment 1,891
Federal Home Loan Bank stock 910
Other assets 1,029
-----------
Total assets $ 82,682
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposit accounts $ 67,550
Advances from the Federal Home Loan Bank 6,700
Advance payments by borrowers for taxes and insurance 202
Other liabilities 599
-----------
Total liabilities 75,051
Stockholders' equity
Common stock - $0.10 par value, 1,500,000 shares authorized,
509,848 shares issued 51
Additional paid-in capital 3,864
Retained earnings 5,199
Treasury stock, at cost, 94,449 shares (1,505)
Unearned employee stock ownership plan shares (41)
Unearned stock awards (25)
Net unrealized gain on securities available-for-sale,
net of income taxes of $44 88
-----------
Total stockholders' equity 7,631
-----------
Total liabilities and stockholders' equity $ 82,682
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3<PAGE>
FIRST FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997 and 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Interest income
First mortgage loans $ 4,095 $ 4,548
Other loans 996 698
Securities 711 496
Mortgage-backed securities 368 620
Interest-earning deposits 168 41
--------- --------
Total interest income 6,338 6,403
Interest expense
Deposit accounts 2,997 2,965
FHLB advances 754 802
--------- --------
Total interest expense 3,751 3,767
--------- --------
NET INTEREST INCOME 2,587 2,636
Provision for loan losses 88 182
--------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,499 2,454
Noninterest income
Loan servicing fees and charges 209 198
Service charge on deposit accounts 208 173
Gain (loss) on sales of loans (24) 87
Loss on sale of securities (171) (415)
Other 69 49
--------- --------
Total noninterest income 291 92
Noninterest expense
Compensation and benefits 1,270 1,117
Occupancy and equipment 307 263
Data processing 250 162
Federal deposit insurance premiums 34 574
Loan origination and servicing 71 142
Professional fees 100 94
Marketing and promotion 101 56
Other 485 398
--------- --------
Total noninterest expense 2,618 2,806
--------- --------
INCOME (LOSS) BEFORE INCOME TAXES 172 (260)
Provision (benefit) for income taxes 48 (102)
--------- --------
NET INCOME (LOSS) $ 124 $ (158)
========= =======
Basic earnings (loss) per share $ .31 $ (.36)
========= =======
Diluted earnings (loss) per share $ .30 $ (.36)
========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1997 and 1996
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Net
Loss on
Additional Unearned Unearned Securities
Common Paid-in Retained Treasury ESOP Stock Available-
Stock Capital Earnings Stock Shares Awards for-Sale Total
----- ------- -------- ----- ------ ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance
January 1, 1996 $ 50 $ 3,677 $ 5,233 $ (460) $ (149) $ (31) $ (448) $7,872
Net loss - - (158) - - - - (158)
Amortization of RRPs - - - - - 5 - 5
Exercise of stock
options, 8,512 shares 1 67 - - - - - 68
Release of earned ESOP
shares, 6,780 shares - 53 - - 54 - - 107
Purchase of treasury stock,
55,532 shares - - - (890) - - - (890)
Increase in fair value
of securities available-
for-sale net of income
taxes of $166 - - - - - - 321 321
-------- -------- -------- -------- -------- ------- ------- ------
Balance at
December 31, 1996 51 3,797 5,075 (1,350) (95) (26) (127) 7,325
Net income - - 124 - - - - 124
Amortization of RRPs - - - - - 1 - 1
Exercise of stock
options, 250 shares - 7 - - - - - 7
Release of earned ESOP
shares, 6,780 shares - 60 - - 54 - - 114
Purchase of treasury stock,
9,727 shares - - - (155) - - - (155)
Increase in fair value
of securities available-
for-sale net of income
taxes of $113 - - - - - - 215 215
-------- -------- -------- -------- -------- ------- ------- ------
Balance at
December 31, 1997 $ 51 $ 3,864 $ 5,199 $ (1,505) $ (41) $ (25) $ 88 $7,631
======== ======== ======== ======== ======== ======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRST FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 124 $ (158)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Amortization of:
Premiums, discounts, and deferred fees on
loans and securities 13 25
Net excess servicing fees and originated
mortgage servicing rights 34 32
Stock award plans 1 5
Employee stock ownership plan 114 107
Provision for losses on loans 88 182
(Gain) loss on sale of:
Loans 24 (87)
Securities 171 415
Premises and equipment - 10
Depreciation of premises and equipment 138 114
Originations of loans held for sale, net of
origination fees and principal collected (12,188) (6,532)
Proceeds from sales of loans held for sale 9,929 6,939
Change in:
Deferred income tax 22 (14)
Accrued interest receivable (9) (64)
Other assets (67) (364)
Other liabilities 15 38
--------- --------
Net cash (used in) provided by operations (1,591) 648
CASH FLOWS FROM INVESTING ACTIVITIES
Loan originations net of principal collected on loans 3,678 (16,374)
Purchases of:
Loan participations (2,176) (7,763)
Mortgage-backed securities available-for-sale - (1,753)
Securities available-for-sale (15,746) (4,900)
Certificates of deposit (3,098) -
Federal Home Loan Bank Stock - (667)
Proceeds from:
Sales of loans 19,685 -
Sales of securities available-for-sale 166 3,744
Sales of mortgage-backed securities available-for-sale 6,954 -
Maturities and calls of securities available-for-sale 6,050 6,050
Maturities and calls of securities held-to-maturity 75 200
Maturities of certificates of deposit 999 -
</TABLE>
(Continued)
F-6<PAGE>
FIRST FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES (continued)
Sales of Federal Home Loan Bank stock $ 238 $ -
Sales of REO 122 -
Principal collected on mortgage-backed securities and
collateralized mortgage obligations 717 1,303
Purchases of premises and equipment (643) (709)
----------- -----------
Net cash provided by (used in) investing activities 17,021 (20,869)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposit accounts 1,712 (392)
Net (decrease) increase in advances from the
Federal Home Loan Bank (13,750) 20,450
Issuance of common stock 7 68
Repurchases of common stock (155) (890)
Net (decrease) increase in advance payments by borrowers
for taxes and insurance (137) 79
----------- -----------
Net cash provided by (used in) financing activities (12,323) 19,315
----------- -----------
Net increase (decrease) in cash 3,107 (906)
Cash and cash equivalents at beginning of year 1,652 2,558
----------- -----------
Cash and cash equivalents at end of year $ 4,759 $ 1,652
=========== ===========
Supplemental disclosures of cash flow information
Cash paid for:
Interest $ 3,837 $ 3,679
Income taxes (refunded) (179) 70
Noncash items
Transfer of held for sale loans to portfolio - 41
Transfer of portfolio loans to REO 122 -
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a description of the significant accounting policies
used by First Financial Bancorp, Inc. (Company) in the preparation of
the accompanying consolidated financial statements.
DESCRIPTION OF THE BUSINESS: First Financial Bancorp, Inc. is the
holding company for its wholly-owned subsidiary, First Federal Savings
Bank (Bank), a federally chartered stock savings bank, and its
principal business is the operation of the Bank.
The Bank's operations consist principally of originating and servicing
residential first mortgage loans secured by properties in northern
Illinois from its facilities in Belvidere and Rockford, Illinois. In
addition, the Bank provides consumer and commercial banking services.
The Bank also offers brokerage and insurance services through its
wholly-owned subsidiary, First Financial Services of Belvidere,
Illinois, Inc. Substantially all of the Bank's income and assets are
derived from these activities, conducted primarily with customers
located in northern Illinois.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of the Company and the accounts of the
Bank and its wholly-owned subsidiary. All significant intercompany
transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amount of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates. The collectibility
of loans, fair values of financial instruments, and status of
contingencies are particularly subject to change.
CASH AND CASH EQUIVALENTS: For the purpose of the statement of cash
flows, cash and cash equivalents include cash on hand, amounts due
from banks, and interest earning-deposits with original maturities of
three months or less. Net cash flows are reported for customer loan
and deposit transactions and interest-bearing deposits with other
banks.
SECURITIES: Securities are classified as held-to-maturity when the
Company has the positive intent and management has the ability to hold
those securities to maturity. Accordingly, they are stated at cost,
adjusted for amortization of premiums and accretion of discounts. All
other securities are classified as available-for-sale since the
Company may decide to sell those securities in response to changes in
market interest rates, liquidity needs, changes in yields or
alternative investments, and for other reasons. These securities are
carried at fair value with unrealized gains and losses charged or
credited, net of income taxes, to a valuation allowance included as a
F-8
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
separate component of stockholders' equity. Realized gains and losses
on disposition are based on the net proceeds and the adjusted carrying
amounts of the securities sold, using the specific identification
method.
LOANS HELD FOR SALE: Loans held for sale are reported at the lower of
cost, less applicable deferred loan fees, or estimated fair value in
the aggregate.
LOANS RECEIVABLE, NET: Loans receivable, net are reported at the
principal balance outstanding, net of deferred loan fees and costs,
loans in process, the allowance for loan losses, unearned discounts,
and charge-offs.
Loan fees and certain direct origination costs are deferred, and the
net deferred fee or cost is recognized as an adjustment to yield using
the level-yield method over the life of the loans.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a
valuation allowance, increased by the provision for loan losses and
decreased by charge-offs less recoveries. Management estimates the
allowance balance required based on past loan loss experience, known
and inherent risks in the portfolio, information about specific
borrower situations and estimated collateral values, economic
conditions, and other factors. Because of uncertainties inherent in
the estimation process, management's estimation of credit losses
inherent in the loan portfolio and the related allowance may change
materially in the near term. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any
loans that, in management's judgment, should be charged-off.
Loan impairment is determined when full payment under the loan term is
not expected. Impairment is evaluated in total for smaller-balance
loans of similar nature such as the Company's residential mortgage,
consumer, and credit card loans and on an individual loan basis for
other loans. If a loan is impaired, a portion of the allowance is
allocated so that the loan is reported, net, at the present value of
estimated future cash flows using the loan's existing rate, or loan's
market price or the fair value of the collateral, if the loan is
collateral dependent. Loans are evaluated for impairment when payments
are delayed, typically 90 days or more, or when the internal grading
system indicates a doubtful classification.
PREMISES AND EQUIPMENT: Land is carried at cost. Bank premises,
furniture, and equipment are reported net of accumulated depreciation.
Depreciation is recorded on the straight-line and accelerated methods
over the estimated useful lives of the related assets.
MORTGAGE SERVICING RIGHTS: The Company allocates the cost of mortgage
servicing rights (MSR) on mortgages originated which have been sold.
The allocation of the total cost of the mortgages to MSR and the
F-9
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
mortgages (without MSR) is based upon their relative fair values.
Servicing rights are then expensed in proportion to, and over the
period of, estimated net servicing revenues. Impairment is evaluated
based upon the fair value of the rights. Any impairment is reported as
a valuation allowance.
When participating interest in mortgages sold have an average
contractual interest rate, adjusted for normal servicing fees, that
differs from the agreed yield to the purchaser, gains or losses are
recognized equal to the present value of such differential over the
estimated remaining life of such loans. The resulting excess
"servicing fee receivable" or "deferred servicing revenue" is
amortized in proportion to and over the period of estimated net
servicing income.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP): Unearned ESOP shares are
reported as a reduction of stockholders' equity in the consolidated
statements of financial condition. As ESOP shares are committed to be
released, unearned ESOP shares are credited, and compensation is
charged, and the amount of the charge is based on fair values of the
committed-to-be-released shares. For purposes of computing net income
per share, ESOP shares that have been committed to be released are
considered outstanding.
INCOME TAXES: The provision for income taxes is based on an asset and
liability approach. The asset and liability approach requires the
recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities.
EARNINGS PER SHARE: The Company adopted Statement of Accounting
Financial Standards (SFAS) No. 128, "Earnings per Share", as of
December 31, 1997. Basic and diluted earnings per share are computed
under this standard for the year ended December 31, 1997. All prior
amounts have been restated to be comparable. Basic earnings per share
is based on net income divided by the weighted average number of
shares outstanding during the period. Diluted earnings per share shows
the dilutive effect of additional common shares issuable under stock
options and the effect of unearned stock awards.
F-10
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 2 - SECURITIES
The amortized cost and fair value of securities available-for-sale are
as follows at December 31, 1997:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury $ 2,241 $ 4 $ - $ 2,245
U.S. Agency 8,556 20 26 8,550
Equity 302 150 - 452
Corporate 1,782 1 - 1,783
Commercial paper 1,478 - 1 1,477
----------- --------- --------- -----------
$ 14,359 $ 175 $ 27 $ 14,507
=========== ========= ========= ===========
</TABLE>
Contractual maturities of debt securities at December 31, 1997 were as
follows. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Securities
Available-for-Sale
------------------
Amortized Fair
(Dollars in thousands) Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ 8,170 $ 8,173
Due from one to five years 4,281 4,272
Due from five to ten years 401 402
Due after ten years 1,205 1,208
Equity securities 302 452
---------- -----------
$ 14,359 $ 14,507
========== ===========
</TABLE>
Proceeds from sales of securities available-for-sale during 1997 and
1996 were $166,000 and $3,744,000. These sales resulted in gross gains
of $69,000 in 1997 and gross losses of $415,000 in 1996.
Securities with an amortized cost of $7,492,000 at December 31, 1997
were pledged to secure certain deposit accounts in excess of federal
deposit insurance limits and other purposes.
F-11
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 3 - MORTGAGE-BACKED SECURITIES
The amortized cost and fair value of mortgage-backed securities
available-for-sale and held to maturity are as follows at December 31,
1997:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
(Dollars in thousands) Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
Available-for-sale
GNMA $ 1,641 $ 9 $ 25 $ 1,625
========= ========= ========= =========
Held-to-maturity
FNMA $ 242 $ - $ 6 $ 236
Collateralized mortgage obligations 622 - 23 599
--------- --------- --------- ---------
$ 864 $ - $ 29 $ 835
========= ========= ========= =========
</TABLE>
Proceeds from sales of mortgage-backed securities and collateralized
mortgage obligations available-for-sale during 1997 were $6,954,000
which resulted in gross losses of $240,000.
The carrying amount of mortgage-backed and related securities are net
of unamortized premiums of $64,000 at December 31, 1997.
Mortgage-backed securities with an amortized cost of $703,000 were
pledged to secure certain deposit accounts in excess of federal
deposit insurance limits and for other purposes.
F-12
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 4 - LOANS RECEIVABLE, NET
Loans receivable at December 31, 1997 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
First mortgage loans
One-to-four-family residential $ 32,735
Other 7,451
-----------
Total first mortgage loans 40,186
Home equity lines of credit 4,300
Auto loans 2,442
Second mortgages 1,249
Credit card receivables 754
Other consumer loans 2,309
Commercial loans 1,470
-----------
Total loans receivable 52,710
-----------
Less:
Allowance for loan losses 531
Unearned discounts, premiums, and deferred
loan origination fees, net 59
-----------
590
-----------
$ 52,120
===========
</TABLE>
At December 31, 1997, the Company has no loans that were classified as
impaired. The principal balance of loans for which the accrual of
interest had been discontinued totaled $825,000.
Activity in the allowance for loan losses for the years ended December
31 is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
---- ----
<S> <C> <C>
Allowance for loan losses
Balance at beginning of year $ 468 $ 330
Provision charged to income 88 182
Loan charge-offs (27) (44)
Loan recoveries 2 -
------- -------
Balance at end of year $ 531 $ 468
======= =======
</TABLE>
F-13
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 4 - LOANS RECEIVABLE, NET (Continued)
Loans are made, in the normal course of business, to executive
officers and directors of the Company. The terms of these loans,
including interest rates and collateral, are similar to those
prevailing for comparable transactions and management believes these
loans do not involve more than the normal risk of collectibility.
Loans outstanding to related parties at December 31, 1997 total
$229,000.
NOTE 5 - SECONDARY MORTGAGE MARKET OPERATIONS
The Company's financial data with respect to its secondary mortgage
market operations at and for the years ended December 31 is summarized
as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
---- ----
<S> <C> <C>
Revenues (direct)
Gain (loss) on sales of loans $ (24) $ 87
Servicing fees on loans sold 171 150
----- -----
$ 147 $ 237
===== =====
Identifiable expenses (direct)
Amortization of mortgage servicing rights $ 34 $ 32
Servicing fees on loans sold 1 1
----- -----
$ 35 $ 33
===== =====
Identifiable assets (direct)
Mortgage servicing rights $ 228 $ 102
Valuation allowance on MSR (16) (15)
----- -----
$ 212 $ 87
===== =====
</TABLE>
Mortgage loans serviced for others are not included in the
accompanying consolidated statement of financial condition. Mortgage
loans serviced are primarily for Federal Home Loan Mortgage
Corporation and Federal National Mortgage Association. The unpaid
principal balances on these loans at December 31 are summarized as
follows:
F-14
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 5 - SECONDARY MORTGAGE MARKET OPERATIONS (Continued)
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
---- ----
<S> <C> <C>
Sold with recourse $ 1,234 $ 1,583
Sold without recourse 68,006 51,019
---------- -----------
$ 69,240 $ 52,602
========== ===========
</TABLE>
Custodial escrow balances maintained in connection with the foregoing
loan servicing were $1,429,000 and $533,000 at December 31, 1997 and
1996, respectively.
Activity in net mortgage servicing rights for the year ended December
31 is summarized as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
---- ----
<S> <C> <C>
Net balance at beginning of year $ 87 $ 88
Additions 159 31
Amortization (24) (17)
Sales (9) -
Provision for impairment (1) (15)
---------- -----------
$ 212 $ 87
========== ===========
</TABLE>
NOTE 6 - PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Land $ 684
Office buildings and improvements 591
Furniture, fixtures and equipment 1,018
Facility under construction 559
----------
2,852
Less accumulated depreciation 961
----------
$ 1,891
==========
</TABLE>
F-15
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 7 - DEPOSIT ACCOUNTS
Deposit accounts at December 31, 1997 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
Non-interest-bearing demand deposit accounts $ 4,371
Interest-bearing demand deposit accounts 4,826
Passbook and club accounts 8,765
Money market demand accounts 6,760
Certificates of deposit 42,828
-----------
$ 67,550
===========
</TABLE>
The aggregate amount of jumbo certificates of deposit with a minimum
denomination of $100,000 was $8,989,000 at December 31, 1997.
At December 31, 1997, the scheduled maturities of certificates of
deposit are as follows (dollars in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998 $ 20,058
1999 7,440
2000 13,293
2001 1,518
2002 and thereafter 519
-----------
$ 42,828
===========
</TABLE>
NOTE 8 - ADVANCES FROM FEDERAL HOME LOAN BANK (FHLB)
FHLB advances at December 31, 1997 are summarized as follows (dollars
in thousands):
<TABLE>
<CAPTION>
Weighted
Interest Amount
Rate Outstanding
---- -----------
<S> <C> <C>
Advances from Federal Home Loan Bank
Fixed rate due in 1998 5.94% $ 6,700
==== =========
</TABLE>
The Company adopted a collateral pledge agreement and agreed to keep
on hand, free of all other pledges, liens, and encumbrances, first
mortgages with unpaid principal balances aggregating no less than 167%
of the outstanding secured advances of the Federal Home Loan Bank. All
stock in the Federal Home Loan Bank of Chicago is also pledged as
additional collateral for advances.
F-16
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 9 - INCOME TAXES
The provision (benefit) for income taxes for the years ended December
31 is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current $ 26 $ (88)
Deferred 6 18
Change in valuation allowance 16 (32)
--------- ---------
$ 48 $ (102)
========= =========
</TABLE>
A reconciliation of income taxes computed at the statutory federal
income tax rate to actual income taxes recorded above for the years
ended December 31 is summarized as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory federal income tax rate 34.0% (34.0)%
Tax exempt income and officers' life insurance (1.4) (0.2)
Other, net (5.0) (5.0)
------- --------
27.6% (39.2)%
======= ========
</TABLE>
No state income taxes were recorded in 1997 and 1996 as a result of
excess qualifying U.S. Government interest, which is tax exempt under
Illinois statutes.
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1997 are summarized as follows (dollars in
thousands):
F-17
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 9 - INCOME TAXES (Continued)
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets
Deferred loan origination fees $ 25
Bad debt deduction 135
Deferred compensation 60
Illinois net operating loss carry forwards 54
Other 2
---------
276
Valuation allowance (54)
---------
222
Deferred tax liabilities
Unrealized gain on securities available-for-sale 44
Depreciation 30
FHLB stock dividends, net 33
Mortgage servicing rights 86
---------
193
---------
Net tax deferred assets $ 29
=========
</TABLE>
Management has recorded a valuation allowance to reduce deferred tax
assets to the amount which it estimates will be realized. The Illinois
net operating losses of approximately $1,141,000 expire in years 2000
through 2011.
The Bank has qualified under provisions of the Internal Revenue Code
which permit it to deduct from taxable income a provision for bad
debts which differs from the provision charged to income on the
financial statements. Tax legislation passed in August 1996 now
requires all thrift institutions to deduct a provision for bad debts
for tax purposes based on actual loss experience and recapture the
excess bad debt reserve accumulated in the tax years after 1987.
Retained earnings at December 31, 1997 includes approximately
$1,181,000, consisting of bad debt deductions accumulated prior to
1987, for which no deferred federal income tax liability has been
recognized.
NOTE 10 - BENEFIT PLANS
Profit-sharing plan:
The Company has a profit sharing plan which meets the
qualifications of Section 401(k) of the Internal Revenue
Code (Code). Under the plan, employees 21 years of age or
older with one year of service and 1,000 hours of service
during that period may make pre-tax contributions up to
applicable limits under the Code. Employees are 100% vested
F-18
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 10 - BENEFIT PLANS (Continued)
in their contributions. Contributions by the Company are
discretionary. Discretionary employer contributions vest at
a rate of 20% per year beginning on the third year of
service by an employee. Contributions totaled $13,000 and
$9,000 in 1997 and 1996, respectively.
Employee stock ownership plan:
The Company has an employee stock ownership plan (ESOP) that
covers employees 21 years of age or older with one year of
service and 1,000 hours of service during that period. The
ESOP borrowed $271,000 from the Company to purchase 33,903
shares of the Company's stock at $8.00 per share on October
1, 1993. The Company has agreed to make scheduled
contributions to the ESOP sufficient to service the amount
borrowed by the ESOP. Contributions made to the ESOP totaled
$54,000 in 1997 and 1996. Compensation expense recognized on
the ESOP amounted to $114,000 and $107,000 in 1997 and 1996,
respectively. Unearned ESOP shares totaling 5,088, with a
carrying amount of $41,000, is reported as a reduction to
stockholder's equity in the consolidated statement of
financial condition at December 31, 1997. The fair value of
unearned ESOP shares approximated $95,000 at December 31,
1997.
The ESOP shares were as follows:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Allocated 22,035
Committed to be released 6,780
Suspense shares 5,088
--------
Total 33,903
========
</TABLE>
Stock option plans:
The Company has two stock option plans which grant options
to individuals to purchase common stock of the Company at a
price equal to the fair market value at the date of grant,
subject to the terms and conditions of the plans. The term
of the stock options will not exceed ten years from the date
of grant. 8,747 shares have been authorized under the
incentive stock option plan for employees, and the options
are exercisable on a cumulative basis in equal installments
at a rate of 20% per year commencing at the date of grant.
On October 1, 1993, 36,499 options were granted under the
plan to employees at an exercise price of $8.00 per share.
F-19
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 10 - BENEFIT PLANS (Continued)
9,687 shares have been authorized under the stock option
plan for outside directors, and the options are exercisable
on the date of grant. On October 1, 1993, 5,861 options were
granted under the plan to outside directors at an exercise
price of $8.00 per share. During 1995 and 1996, additional
options were granted to employees under the plan.
Information about option grants are as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Options Price
------- -----
<S> <C> <C>
Outstanding at January 1, 1996 26,444 $ 8.290
Granted 2,400 15.500
Exercised (8,512) 8.000
Forfeited (6,358) 8.000
----------- -------------
Outstanding at December 31, 1996 13,974 9.830
Granted - -
Exercised (250) 8.000
Forfeited (1,210) 8.000
----------- -------------
Outstanding at December 31, 1997 12,514 $ 10.040
=========== =============
</TABLE>
Options granted and exercisable at December 31, 1997 are
11,094 at a weighted average price of $9.35. At December 31,
1997, the range of the exercisable price is $8.00 to $15.625
with an average remaining life of 6 years.
The Company accounts for its stock option plan under
Accounting Principle Board Opinion (APBO) No. 25,
"Accounting for Stock Issued to Employees". Accordingly, no
compensation expense has been recognized for the 1997 stock
option plan in the financial statements. Statement of
Financial Accounting Standards (SFAS) No. 123 "Accounting
for Stock Based Compensation", became effective for the
first time in 1996. This statement prescribes new methods
for determining compensation expense under stock option
plans, but allows corporations to use APBO No. 25 if they
provide pro forma information computed under the new
standard. Had compensation cost been computed under the
methodology contained in SFAS No. 123, net income would have
been reduced by approximately $2,440 and $5,580 for 1997 and
1996, respectively, with no effect on earnings per share. In
future years, the pro forma effect of not applying the
standard is expected to increase as additional options are
granted. The weighted average fair value of the options
F-20
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 10 - BENEFIT PLANS (Continued)
granted during 1996 is estimated at $4.58 on the date of
grant using the Black-Scholes option value model with the
following assumptions: dividend yield of 0, a risk free
interest rate of 6.5%, expected volatility of stock price of
11.90%, an assumed forfeiture rate of 0%, and an average
life of five years.
Management recognition and retention plans and trusts:
The Company has two management recognition plans and trusts
(RRPs) as a method of providing officers and outside
directors with a proprietary interest in the Company. Such
awards are to be earned by the individuals, subject to terms
of the RRPs. Stock awarded under the plan will vest on a
cumulative basis in equal installments at a rate of 33-1/3%
per year commencing one year from the date of grant or as
specified by plan trustees. The number of shares held by the
RRPs totaled 19,374 shares. On October 1, 1993, 18,471
shares were granted to officers and outside directors. The
cost of the awards are amortized on the straight-line basis
over the vesting terms. Compensation expense under these
plans amounted to $1,000 and $5,000 in 1997 and 1996,
respectively.
NOTE 11 - EARNINGS PER SHARE
A reconciliation of the numerators and denominators for earnings per
common share computations for the years ended December 31 is presented
below (dollars and shares in thousands).
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
BASIC EARNINGS PER SHARE
Net income (loss) available to common stockholders $ 124 $ (158)
========= =========
Weighted average common shares outstanding 403 442
========= =========
BASIC EARNINGS PER SHARE .31 (.36)
========= =========
EARNINGS PER SHARE ASSUMING DILUTION
Net income (loss) available to common stockholders $ 124 $ (158)
========= =========
Weighted average common shares outstanding 403 442
Add: dilutive effect of assumed exercises:
Incentive stock options 5 5
--------- ---------
Weighted average common and dilutive
potential shares outstanding 408 447
========= =========
DILUTED EARNINGS PER SHARE 0.30 (0.36)
========= =========
</TABLE>
F-21
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 12 - REGULATORY MATTERS
The Bank is subject to regulatory capital requirements administered by
the federal regulatory agencies. Capital adequacy guidelines and
prompt corrective action regulations involve quantitative measures of
assets, liabilities, and certain off-balance-sheet items calculated
under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgements by
regulators about components, risk weightings, and other factors, and
the regulators can lower classifications in certain cases. Failure to
meet various capital requirements can initiate regulatory action that
could have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized,
although these terms are not used to represent overall financial
condition. If adequately capitalized, regulatory approval is required
to accept brokered deposits. If undercapitalized, capital
distributions are limited as is asset growth and expansion, and plans
for capital restoration are required.
At year-end, the Bank's regulators categorized the Bank as well
capitalized. Actual capital levels (in millions) and minimum capital
required levels were:
<TABLE>
<CAPTION>
Minimum Required
to Be Well
Minimum Required Capitalized Under
for Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
December 31, 1997 Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk-weighted assets) $ 7.7 15.4% $ 4.0 8.0% $ 5.0 10.0%
Tier 1 (core) capital (to risk-weighted
assets) $ 7.2 14.4% $ 2.0 4.0% $ 3.0 6.0%
Tier 1 (core) capital (to adjusted total
assets) $ 7.2 8.6% $ 2.5 3.0% $ 4.1 5.0%
Tier 1 capital to average assets $ 7.2 8.1% $ 3.5 4.0% $ 4.4 5.0%
Tangible capital (to adjusted total
assets) $ 7.2 8.6% $ 1.2 1.5% N/A N/A
</TABLE>
Federal regulations require the Bank to comply with a Qualified Thrift
Lender (QTL) test which requires that 65% of assets be maintained in
housing-related finance and other specified assets. If the QTL test is
not met, limits are placed on growth, branching, new investments, FHLB
advances, and dividends or the institution must convert to a
commercial bank charter. Management considers the QTL test to have
been met.
F-22
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 12 - REGULATORY MATTERS (Continued)
On October 1, 1993, the Bank converted from a federally-chartered
mutual savings and loan association to a federally chartered stock
savings bank subsidiary of First Financial Bancorp, Inc. (Company), a
newly formed and registered savings bank holding company. The Company
issued 484,338 shares of common stock at $8.00 per share. The net
proceeds, after deducting conversion expenses of $401,000 were
$3,473,000 and were recorded as common stock and additional paid-in
capital in the consolidated statement of financial condition. The
Company used $2,200,000 of the net proceeds to acquire all the common
stock of the Bank.
As part of the conversion to the stock form of ownership on October 1,
1993, the Bank established a liquidation account for the benefit of
eligible depositors as of December 31, 1992, the eligibility record
date, who continue to maintain deposits in the Bank after the
conversion. The initial balance of the liquidation account was equal
to the retained earnings of the Bank as of December 31, 1992. In the
unlikely event of a complete liquidation of the Bank each eligible
account holder would receive from the liquidation account, a
liquidation distribution based on their proportionate share of the
then total remaining qualifying deposits, prior to any distribution
with respect to the Bank's capital stock.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK,
COMMITMENTS, AND CONTINGENCIES
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit and previously approved unused lines of credit. Those
instruments involve, to varying degrees, elements of credit and
interest-rate risk in excess of the amount recognized in the statement
of financial condition.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and previously approved unused lines of credit is
represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and
conditional obligations as it does for loans recorded in the statement
of financial condition. Financial instruments whose contract amounts
represent credit risk at December 31, 1997 are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
Commitments to originate loans; rates range from 7.250% to 9.500% $ 1,692
Unused lines of credit 5,158
Standby letters of credit 146
Commitments to purchase loan participations 1,396
</TABLE>
F-23
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK,
COMMITMENTS, AND CONTINGENCIES (Continued)
At December 31, 1997, the Company serviced mortgage loans with unpaid
principal balances of $1,234,000 which were sold under agreements for
which the buyers have recourse options. The Company does not
anticipate any significant losses as a result of these agreements.
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Corporations are required to disclose fair value information about
their financial instruments. SFAS No. 107 defines the fair value of a
financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale. The methods and assumptions used to
determine fair values for each class of financial instruments are
presented below:
The estimated fair value for cash and cash equivalents,
interest-bearing deposits with financial institutions, Federal Home
Loan Bank stock, accrued interest receivable, mortgage servicing
rights, NOW, money market and savings deposits, short-term borrowings,
and accrued interest payable are considered to approximate their
carrying values. The estimated fair value for securities
available-for-sale and securities held-to-maturity are based on quoted
market values for the individual securities or for equivalent
securities. The estimated fair value for portfolio loans is based on
estimates of the rate the Company would charge for similar loans at
December 31, 1997 applied for the time period until the estimated
payment. The estimated fair value of loans held for sale is based on
the prevailing secondary market prices for similar loans at December
31, 1997. The estimated fair value of certificates of deposit is based
on estimates of the rate the Company would pay on such deposits at
December 31, 1997 applied for the time period until maturity. The
estimated fair value of Federal Home Loan Bank advances is based on
the estimate of the rate the Company would pay for such advances at
December 31, 1997 for a time period until maturity. Loan commitments
are not included in the table below as their estimated fair value is
immaterial.
F-24
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 14 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
<TABLE>
<CAPTION>
Estimated
(Dollars in thousands) Carrying Fair
Value Value
----- -----
<S> <C> <C>
Financial instruments in assets
Cash on hand and in banks $ 4,759 $ 4,759
Securities available-for-sale 14,507 14,507
Mortgage-backed securities available-for-sale 1,625 1,625
First mortgage loans held for sale 2,352 2,366
Mortgage-backed securities 864 835
Certificates of deposit 2,099 2,101
Loans receivable, net 52,120 53,192
Federal Home Loan Bank stock 910 910
Mortgage servicing rights 212 212
Accrued interest receivable 526 526
Financial instrument liabilities
DDA, NOW, money market, and passbook savings 24,722 24,722
Certificates of deposit 42,828 43,312
FHLB advances 6,700 6,699
Accrued interest payable 144 144
</TABLE>
Other assets and liabilities of the Company that are not defined as
financial instruments such as property and equipment, are not included
in the above disclosures. Also not included are nonfinancial
instruments typically not recognized in financial statements such as
loan servicing rights (originated prior to January 1, 1995), customer
goodwill, and similar items.
While the above estimates are based on management's judgement of the
most appropriate factors, there is no assurance that were the Company
to have disposed of these items on December 31, 1997, the fair values
would have been achieved, because the market value may differ
depending on the circumstances. The estimated fair values at December
31, 1997 should not necessarily be considered to apply at subsequent
dates.
F-25
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 15 - FIRST FINANCIAL BANCORP, INC. (PARENT COMPANY)
Presented below are the parent company's condensed balance sheet,
condensed statements of income, and condensed statements of cash
flows:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
December 31, 1997
(In thousands)
<S> <C>
ASSETS
Cash and cash equivalents $ 232
Securities available-for-sale 191
Loans receivable for ESOP 61
Investment in subsidiary 7,189
Other assets 21
-----------
Total assets $ 7,694
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Other liabilities $ 63
-----------
Stockholders' equity
Common stock 51
Additional paid-in capital 3,864
Retained earnings 5,199
Treasury stock (1,505)
Other 22
-----------
Total stockholders' equity 7,631
-----------
Total liabilities and stockholders' equity $ 7,694
===========
</TABLE>
F-26
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 15 - FIRST FINANCIAL BANCORP, INC. (PARENT COMPANY) (Continued)
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Income
Interest income $ 12 $ 12
Gains on sales of securities 69 -
--------- ---------
Total income 81 12
Expense
Professional fees 25 14
Other 33 31
--------- ---------
Total expense 58 45
--------- ---------
INCOME (LOSS) BEFORE INCOME TAX PROVISION (BENEFIT) AND EQUITY
IN UNDISTRIBUTED NET INCOME (LOSS) OF SUBSIDIARY 23 (33)
Income taxes (benefit) 8 (11)
--------- ---------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED NET
INCOME (LOSS) OF SUBSIDIARY 15 (22)
Equity in undistributed net income (loss) of subsidiary 109 (136)
--------- ---------
NET INCOME (LOSS) $ 124 $ (158)
========= =========
</TABLE>
F-27
<PAGE>
FIRST FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 15 - FIRST FINANCIAL BANCORP, INC. (PARENT COMPANY) (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 124 $ (158)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Equity in undistributed net income (loss) of subsidiary (109) 136
Gain on sales of securities available-for-sale (69) -
Decrease (increase) in other assets (7) (13)
Increase in other liabilities 44 -
--------- ---------
Net cash used in operating activities (17) (35)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of securities available-for-sale - (106)
Proceeds from sales of securities available for sale 166 -
Principal collected on loan for ESOP 54 54
--------- ---------
Net cash provided by (used in) investing activities 220 (52)
CASH FLOW FROM FINANCING ACTIVITIES
Proceeds from sale of common stock 7 68
Purchase of treasury stock (155) (890)
--------- ---------
Net cash used in financing activities (148) (822)
--------- ---------
Increase (decrease) in cash and cash equivalents 55 (909)
Cash and equivalents at beginning of year 177 1,086
--------- ---------
CASH AND EQUIVALENTS AT END OF YEAR $ 232 $ 177
========= =========
</TABLE>
F-28
<PAGE>
APPENDIX A
AGREEMENT OF MERGER
BY AND AMONG
BLACKHAWK BANCORP, INC., BLACKHAWK ACQUISITION CORP.
AND
FIRST FINANCIAL BANCORP, INC.
Dated as of May 7, 1998
A-1
<PAGE>
TABLE OF CONTENTS
AGREEMENT OF MERGER . . . . . . . . . . . . . . . . . . . . . . . A-6
ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . . A-6
1.1 THE MERGER . . . . . . . . . . . . . . . . . . . . . . A-6
1.2 EXCHANGE AGENT . . . . . . . . . . . . . . . . . . . . A-8
1.3 FUNDING OF EXCHANGE AGENT . . . . . . . . . . . . . . . A-8
1.4 CLOSING; EFFECTIVE TIME . . . . . . . . . . . . . . . . A-8
1.5 STOCK OPTIONS . . . . . . . . . . . . . . . . . . . . . A-9
ARTICLE II STATEMENTS OF ESSENTIAL FACTS CONCERNING FIRST
FINANCIAL . . . . . . . . . . . . . . . . . . . . . . . . . A-9
2.1 ORGANIZATION, GOOD STANDING AND AUTHORITY . . . . . . . A-9
2.2 ORGANIZATIONAL DOCUMENTS; MINUTES AND STOCK RECORDS . . A-10
2.3 CAPITALIZATION OF FIRST FINANCIAL . . . . . . . . . . . A-10
2.4 FINANCIAL STATEMENTS AND OTHER REPORTS . . . . . . . . A-10
2.5 SEC DOCUMENTS . . . . . . . . . . . . . . . . . . . . . A-11
2.6 UNDISCLOSED LIABILITIES . . . . . . . . . . . . . . . . A-12
2.7 LOAN PORTFOLIO AND DELINQUENT LOANS . . . . . . . . . . A-12
2.8 NO ADVERSE CHANGES . . . . . . . . . . . . . . . . . . A-13
2.9 CONDUCT OF BUSINESS IN NORMAL COURSE . . . . . . . . . A-13
2.10 PROPERTIES AND ASSET . . . . . . . . . . . . . . . . . A-13
2.11 INSURANCE . . . . . . . . . . . . . . . . . . . . . . . A-14
2.12 LITIGATION AND COMPLIANCE WITH LAWS . . . . . . . . . . A-14
2.13 CONFLICT OF INTEREST TRANSACTIONS . . . . . . . . . . . A-14
2.14 SIGNIFICANT CONTRACTS . . . . . . . . . . . . . . . . . A-15
2.15 NO DEFAULTS . . . . . . . . . . . . . . . . . . . . . . A-16
2.16 ADDITIONAL SCHEDULES . . . . . . . . . . . . . . . . . A-16
2.17 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . A-16
2.18 EMPLOYEE COMPENSATION AND BENEFIT PLANS . . . . . . . . A-16
2.19 AUTHORIZATION OF TRANSACTIONS . . . . . . . . . . . . . A-17
2.20 ENVIRONMENTAL SUITS AND PROCEEDINGS . . . . . . . . . . A-18
2.21 CONTAMINATED PROPERTIES . . . . . . . . . . . . . . . . A-18
2.22 CHANGE IN BUSINESS RELATIONSHIPS . . . . . . . . . . . A-18
2.23 BROKER'S AND FINDER'S FEES . . . . . . . . . . . . . . A-18
2.24 YEAR 2000 COMPLIANCE . . . . . . . . . . . . . . . . . A-18
ARTICLE III STATEMENTS OF ESSENTIAL FACTS CONCERNING BLACKHAWK
AND
ACQUISITION CORP. . . . . . . . . . . . . . . . . . . . . . A-19
3.1 CORPORATE EXISTENCE . . . . . . . . . . . . . . . . . . A-19
3.2 FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . A-19
3.3 AUTHORIZATION OF TRANSACTIONS . . . . . . . . . . . . . A-19
3.4 FINANCIAL RESOURCES . . . . . . . . . . . . . . . . . . A-20
ARTICLE IV ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . A-20
4.1 CONDUCT OF BUSINESS OF FIRST FINANCIAL . . . . . . . . A-20
4.2 CONDUCT OF BUSINESS OF BLACKHAWK . . . . . . . . . . . A-22
4.3 ACCESS TO INFORMATION AND ATTENDANCE AT BOARD MEETINGS A-22
4.4 FIRST FINANCIAL STOCKHOLDERS' MEETING . . . . . . . . . A-23
4.5 FIRST FINANCIAL PROXY MATERIALS . . . . . . . . . . . . A-23
A-2
<PAGE>
4.6 REASONABLE EFFORTS . . . . . . . . . . . . . . . . . . A-24
4.7 REGULATORY APPROVALS . . . . . . . . . . . . . . . . . A-24
4.8 BUSINESS RELATIONS AND PUBLICITY . . . . . . . . . . . A-24
4.9 LOAN REVIEW . . . . . . . . . . . . . . . . . . . . . . A-24
4.10 NO CONDUCT INCONSISTENT WITH THIS AGREEMENT . . . . . . A-24
4.11 BOARD OF DIRECTORS' NOTICES, MINUTES, ETC. . . . . . . A-26
4.12 CONFIDENTIAL INFORMATION . . . . . . . . . . . . . . . A-26
4.13 MAINTENANCE OF CAPITAL LEVELS . . . . . . . . . . . . . A-26
4.14 NO CONTROL OF FIRST FINANCIAL BY BLACKHAWK . . . . . . A-26
4.15 EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . A-27
4.16 INDEMNIFICATION AND DIRECTORS' AND OFFICERS' LIABILITY
INSURANCE . . . . . . . . . . . . . . . . . . . . . . . A-27
4.17 BOARD OF DIRECTORS OF FIRST FINANCIAL AND THE BANK . . A-27
4.18 EMPLOYEE BENEFIT PLANS . . . . . . . . . . . . . . . . A-27
4.19 FIRST FINANCIAL EMPLOYMENT, SEVERANCE AND SUPPLEMENTAL
AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . A-29
4.20 LEASE AGREEMENT FOR ROCKFORD BRANCH . . . . . . . . . . A-30
4.21 SUBSIDIARY BANK MERGER . . . . . . . . . . . . . . . . A-30
4.22 STOCKHOLDER VOTING AGREEMENTS . . . . . . . . . . . . . A-30
4.23 ENVIRONMENTAL AUDITS/REMEDIATION . . . . . . . . . . . A-31
ARTICLE V CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . A-32
5.1. CONDITIONS PRECEDENT TO OBLIGATIONS OF BLACKHAWK . . . A-32
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF FIRST FINANCIAL A-35
ARTICLE VI GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . A-37
6.1 NON-SURVIVAL OF STATEMENTS OF ESSENTIAL FACTS AND
COVENANTS . . . . . . . . . . . . . . . . . . . . . . . A-37
6.2 FURTHER ASSURANCES . . . . . . . . . . . . . . . . . . A-37
6.3 EXPENSES . . . . . . . . . . . . . . . . . . . . . . . A-38
6.4 SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . A-39
6.5 TERMINATION . . . . . . . . . . . . . . . . . . . . . . A-39
6.6 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . A-40
6.7 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . A-41
6.8 COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . A-41
6.9 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . A-41
6.10 ENTIRE AGREEMENT; AMENDMENT . . . . . . . . . . . . . . A-41
A-3
<PAGE>
EXHIBITS
Exhibit A Form of Stock Option Cancellation Agreement
Exhibit B Form of Stockholder Voting Agreement
A-4
<PAGE>
FIRST FINANCIAL DISCLOSURE SCHEDULES
Schedule 2.1 Bank Ownership of Voting Stock, etc.
Schedule 2.3 List of Option Holders
Schedule 2.6 Undisclosed Liabilities
Schedule 2.7(b) Delinquent Loans
Schedule 2.10 Real Property and Leaseholds
Schedule 2.12 Litigation and Compliance with Laws
Schedule 2.13 Conflict of Interest Transactions
Schedule 2.14 Significant Contracts
Schedule 2.16(a) Real Estate
Schedule 2.16(b) Securities
Schedule 2.18 Post-Retirement Welfare Benefits
Schedule 2.21 Contaminated Properties
Schedule 2.24 Year 2000 Documents
Schedule 4.1(o) Definition of Miller & Schroeder Loans
A-5
<PAGE>
AGREEMENT OF MERGER
This Agreement of Merger (this "AGREEMENT") is made and entered
into as of the 7th day of May, 1998, by and among BLACKHAWK BANCORP,
INC., a Wisconsin corporation ("Blackhawk"), BLACKHAWK ACQUISITION
CORP., a Delaware corporation and wholly-owned subsidiary of Blackhawk
("Acquisition"), and FIRST FINANCIAL BANCORP, INC., a Delaware
corporation ("First Financial").
WHEREAS, the respective Boards of Directors of the parties
hereto deem it advisable and in the best interests of the parties
hereto and their respective stockholders to consummate the Merger (as
defined in SECTION 1.1) between Acquisition and First Financial, upon
the terms and subject to the conditions of this Agreement;
WHEREAS, concurrently with or as soon as practicable after
the Merger, Blackhawk and First Financial shall cause First
Financial's wholly-owned depository institution subsidiary, First
Federal Savings Bank (the "Bank"), to be merged with Blackhawk's
wholly-owned depository institution subsidiary, Blackhawk State Bank
("BSB") (the "Bank Merger"), such that BSB is the resulting wholly-
owned depository institution subsidiary of Blackhawk (hereinafter
sometimes called the "Surviving Bank") in the Bank Merger;
WHEREAS, subsequent to the Merger and the Bank Merger,
Blackhawk intends to merge First Financial with and into Blackhawk
with Blackhawk surviving such merger and after such merger and the
Bank Merger, BSB shall continue to be a wholly-owned subsidiary of
Blackhawk; and
WHEREAS, the parties hereto desire to make certain
representations, warranties, covenants and agreements in connection
with this Agreement and the Merger;
NOW THEREFORE, in consideration of the premises and the
mutual representations, warranties, covenants, agreements and
conditions herein contained, the parties hereto covenant and agree as
follows:
ARTICLE I
THE MERGER
1.1 THE MERGER. Subject to the terms and conditions of this
Agreement and in accordance with the Delaware General Corporation Law
("DGCL"), at the Effective Time (as defined in SECTION 1.4 hereof),
Acquisition Corp. shall be merged with and into First Financial (the
"MERGER"). The separate corporate existence of Acquisition Corp.
shall cease, and First Financial shall be the surviving corporation
(the "SURVIVING CORPORATION") in the Merger, shall be considered the
same business and corporate entity as each merging corporation, and
A-6
<PAGE>
shall have the other properties, liabilities and attributes as
provided by the DGCL. Pursuant to the Merger:
(a) the Certificate of Incorporation of First Financial, as
in effect immediately prior to the Effective Time, shall be, from and
after the Effective Time, the Certificate of Incorporation of the
Surviving Corporation;
(b) the Bylaws of Acquisition Corp., as in effect
immediately prior to the Effective Time, shall be, from and after the
Effective Time, the Bylaws of the Surviving Corporation;
(c) the directors of Acquisition Corp. immediately prior to
the Effective Time shall be, from and after the Effective Time, the
directors of the Surviving Corporation to serve until his or her
death, resignation or removal or until his or her successor is duly
elected and qualified;
(d) the officers of Acquisition Corp. immediately prior to
the Effective Time shall be, from and after the Effective Time, the
officers of the Surviving Corporation to serve until his or her death,
resignation or removal or until his or her successor is duly elected
and qualified;
(e) the 1,500 shares of common stock, without par value per
share, of Acquisition Corp., issued and outstanding immediately prior
to the Effective Time, shall be converted, without any action by the
holder thereof, into 100 shares of common stock, $0.10 par value per
share, of the Surviving Corporation; and
(f) each share of common stock, $.10 par value per share,
of First Financial ("First Financial Share"), issued and outstanding
immediately prior to the Effective Time, other than First Financial
Shares (i) the holders of which have validly demanded appraisal of
such shares pursuant to Section 262 of the DGCL ("Section 262") and
have not voted such shares in favor of the Merger ("Dissenting
Shares"), (ii) owned by First Financial as treasury shares, if any,
(iii) owned by the Recognition and Retention Plans (as defined in
SECTION 4.18(d)) and not allocated to participants thereunder, or (iv)
owned by Blackhawk, shall be converted by virtue of the Merger,
automatically and without action by the holder thereof, into the right
to receive $30.00, less the amount, if any, by which the Closing
Equity (as defined below) is less than $7,560,000, divided by the
total number of First Financial Shares outstanding plus any Options to
purchase First Financial Shares, as defined in SECTION 1.5 hereof,
outstanding as of the Effective Time (the "Merger Price"); provided,
however, that in no event shall the Merger Price be less than $29.00
per share. CLOSING EQUITY is defined as the stockholders' equity of
First Financial as of the Closing Date determined in accordance with
generally accepted accounting principles, consistently applied, but
(i) shall exclude the SFAS 115 adjustment at the Closing Date; (ii)
shall be reduced by any nonrecurring or extraordinary net gains
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(including all cumulative securities gains) in excess of $5,000 since
December 31, 1997; and (iii) shall be reduced by all legal, accounting
and investment banking fees relating to the Merger, including any
contingent fee payments, not previously expensed or accrued for as of
the Closing Date.
The Merger Price shall be payable by Blackhawk, in cash,
without any interest thereon from the Effective Time until the time of
payment, at the Effective Time or such date thereafter as certificates
shall be surrendered in accordance with SECTION 1.2 of this
Agreement.
(g) The Dissenting Shares shall not be converted into the
right to receive the Merger Price at or after the Effective Time
unless and until the holder of such shares withdraws the demand for
appraisal of their shares or otherwise becomes ineligible to pursue
appraisal rights under the DGCL. If converted into the right to
receive the Merger Price or other amount of consideration in
settlement of an appraisal demand or by order of a court of competent
jurisdiction, the Dissenting Shares shall be canceled and shall cease
to exist.
(h) At the Effective Time, all First Financial Shares
referred to in SECTION 1.1(f) (ii), (iii) and (iv) shall be canceled
and shall cease to exist, and no consideration shall be delivered in
exchange therefor.
1.2 EXCHANGE AGENT. Prior to the Closing (as defined in SECTION
1.4), Blackhawk shall designate an exchange agent reasonably
satisfactory to First Financial to deliver to the stockholders of
First Financial the cash to which they are entitled pursuant to the
Merger. With the approval of First Financial, not to be unreasonably
withheld, Blackhawk and the exchange agent shall prepare and
communicate to the stockholders of First Financial instructions and
procedures for the stockholders to tender certificates evidencing
First Financial Shares to the exchange agent in exchange for the
Merger Price.
1.3 FUNDING OF EXCHANGE AGENT. Blackhawk shall irrevocably
deposit with the Exchange Agent at the Effective Time, by wire, or
other acceptable means approved by First Financial, the total amount
of funds required to be paid at the Effective Time pursuant to SECTION
1.1 hereof for exchanges in accordance with this Agreement.
1.4 CLOSING; EFFECTIVE TIME. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take place on
such date and at such time and place as the parties may mutually
agree, which shall be no later than the last business day of the
calendar month in which all of the conditions precedent to the Merger
set forth in Article V have occurred if such conditions shall have
occurred not later than the 15th day of such month; provided, however,
that if such conditions shall have occurred later than the 15th day of
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such month, then the Closing shall take place no later than the 15th
day of the next following month, unless such date is extended by
mutual agreement of the parties (hereinafter referred to sometimes as
the "Closing Date"). The parties hereto agree to file on the Closing
Date a Certificate of Merger, as contemplated by Section 251(c) of the
DGCL. The Merger shall be effective upon the close of business on the
day when the Certificate of Merger has been accepted for filing by the
Delaware Secretary of State (the "Effective Time") unless the parties
otherwise subsequently agree.
1.5 STOCK OPTIONS. Each holder of an option to acquire First
Financial Shares ("Option") awarded under the First Financial Bancorp,
Inc. 1993 Incentive Stock Option Plan or the First Financial Bancorp,
Inc. 1993 Stock Option Plan for Outside Directors (the "First
Financial Option Plans"), which is outstanding at the Effective Time
shall receive from Blackhawk, as of the Effective Time, whether or not
the Option is then exercisable under the terms of the First Financial
Option Plans, a lump sum cash payment in an amount equal to the
product of (i) the number of First Financial Shares subject to such
Option at the Effective Time, and (ii) the amount, if any, by which
the Merger Price exceeds the exercise price per share of such Option,
net of any cash that must be withheld under federal and state income
and employment tax requirements. Such cash payments shall be in
consideration of, and shall result in, the settlement and cancellation
of all such Options. As a condition to the receipt of a lump sum cash
payment in cancellation of all such Options, each option holder shall
execute a stock option cancellation agreement in substantially the
form attached hereto as EXHIBIT A.
ARTICLE II
STATEMENTS OF ESSENTIAL FACTS CONCERNING FIRST FINANCIAL
This Agreement is entered into by Blackhawk upon the
understanding, and First Financial represents and warrants, that the
following Statements of Essential Facts, being the only
representations or warranties made to Blackhawk by or on behalf of
First Financial in connection with the transactions contemplated by
this Agreement, are true and correct on the date of this Agreement:
2.1 ORGANIZATION, GOOD STANDING AND AUTHORITY. First Financial
is a corporation duly organized, validly existing and in good standing
under the laws of the State of Delaware and has the corporate power
and authority to own its property and assets and to carry on its
business as it is now being conducted. First Financial is registered
as a savings and loan holding company under the Home Owners' Loan Act
("HOLA"). The Bank is a federal savings association chartered under
the laws of the United States of America and all of its issued and
outstanding shares of common stock are owned of record and
beneficially by First Financial. The Bank is duly organized, validly
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existing and in good standing under the laws of the United States of
America and has the corporate power and authority to own its property
and assets and to carry on its business as it is now being conducted.
The Bank is a member in good standing of the Federal Home Loan Bank
System. The deposits of the Bank are insured up to applicable limits
by the Federal Deposit Insurance Corporation (the "FDIC") through the
Savings Association Insurance Fund. The Bank does not own or control
any voting stock or equity securities of any other entity, except as
set forth in SCHEDULE 2.1.
2.2 ORGANIZATIONAL DOCUMENTS; MINUTES AND STOCK RECORDS. First
Financial has furnished Blackhawk a copy of its Certificate of
Incorporation and bylaws and the charter and bylaws of the Bank, in
each case as amended to the date hereof, and such other documents
relating to the authority of First Financial and the Bank to conduct
their business as Blackhawk has requested. All such documents are
complete and correct copies of the original documents. The stock
register of First Financial and minute books of First Financial and
the Bank are complete and correct in all material respects and
accurately reflect all meetings, consents and other actions of the
organizers, incorporators, shareholders and stockholders (as the case
may be), Board of Directors and committees of the Board of Directors
of First Financial and the Bank and all transactions in the capital
stock of First Financial and the Bank, occurring since First
Financial's initial organization.
2.3 CAPITALIZATION OF FIRST FINANCIAL. The authorized capital
stock of First Financial consists of 1,500,000 shares of common stock,
$.10 par value per share, of which 415,452 shares are issued and
outstanding and 250,000 shares of preferred stock, $.01 par value per
share, of which no shares are issued and outstanding. 21,082 shares
of common stock are reserved for issuance upon the exercise of options
issued under the First Financial Option Plans of which 11,461 are
subject to options presently outstanding. Set forth on SCHEDULE 2.3
is a list of the option holders and the exercise price for each
Option. The issued and outstanding shares of First Financial have
been duly and validly authorized and issued and are fully paid and
nonassessable. Except for the aforesaid options to purchase shares of
First Financial Common Stock (which shall be canceled pursuant to
SECTION 1.5 hereof), and except for the rights of Blackhawk under this
Agreement there are or will be at the Closing no options, agreements,
contracts or other rights in existence to purchase or acquire from
First Financial any shares of capital stock of First Financial,
whether now or hereafter authorized or issued. There are 3,043 First
Financial Shares owned by the Recognition and Retention Plans (as
defined in SECTION 4.18(d)) and not allocated to participants
thereunder.
2.4 FINANCIAL STATEMENTS AND OTHER REPORTS. First Financial has
furnished Blackhawk true and complete copies of the following
financial statements and reports of First Financial and the Bank:
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(a) Consolidated Statements of Financial Condition,
Statements of Income, Statements of Cash Flows and Statements of
Stockholders' Equity of First Financial at and for the years ended
December 31, 1997, 1996 and 1995 (collectively, the "First Financial
Financial Statements");
(b) Thrift Financial Reports filed by the Bank with the
Office of Thrift Supervision (the "OTS") for the fiscal years ended
December 31, 1997 and 1996;
(c) Unaudited Consolidated Statement of Financial Condition
and Statement of Operations of First Financial for and at the two
month period ended February 28, 1998.
The First Financial Statements described in clause (a) above
are audited and have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis, and,
together with the notes thereto, present fairly in all material
respects the financial position of First Financial at the dates shown
and the results of operations for the years then ended.
The information contained in the reports described in
clauses (b) and (c) above do not contain any untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements made therein not
misleading.
2.5 SEC DOCUMENTS. First Financial has made available to
Blackhawk a true and complete copy of each report, schedule,
registration statement and definitive proxy statement filed by First
Financial with the Securities and Exchange Commission (the "SEC")
(other than reports filed pursuant to SECTION 13(d) or 13(g) of the
Securities Exchange Act of 1934 (the "Exchange Act")) since December
31, 1992 (as such documents have since the time of their filing been
amended, the "First Financial SEC Documents"), which are all the
documents (other than preliminary material and reports required
pursuant to SECTION 13(d) or 13(g) of the Exchange Act) that First
Financial was required to file with the SEC since such date. As of
their respective dates of filing with the SEC, the First Financial SEC
Documents complied in all material respects with the requirements of
the Securities Act of 1933, as amended (the "Securities Act"), or the
Exchange Act, as the case may be, and the rules and regulations of the
SEC thereunder applicable to such First Financial SEC Documents, and
did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
they were made, not misleading. The financial statements of First
Financial included in the First Financial SEC Documents complied as to
form, as of their respective dates of filing with the SEC, in all
material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, have
been prepared in accordance with generally accepted accounting
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principles applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto or, in the case of
the unaudited statements, as permitted by Form 10-QSB of the SEC) and
fairly present in all material respects the consolidated financial
position of First Financial as of the dates thereof and the
consolidated results of operations, changes in stockholders' equity
and cash flows for the years then ended. All material agreements,
contracts and other documents required to be filed as exhibits to any
of the First Financial SEC Documents have been so filed.
2.6 UNDISCLOSED LIABILITIES. As of the date hereof, except for
those liabilities that are fully reflected or reserved against in the
First Financial Financial Statements, liabilities disclosed in
SCHEDULE 2.6 and liabilities incurred in the ordinary course of
business since December 31, 1997, neither First Financial nor any of
its Subsidiaries has incurred any liability of any nature whatsoever
(whether absolute, accrued, contingent or otherwise and whether due or
to become due) that, either alone or when combined with similar
liabilities, has had, or could reasonably be expected to have, a
Material Adverse Effect on First Financial. As used in this
Agreement, the term "Material Adverse Effect," means, with respect to
First Financial or Blackhawk, as the case may be, a material effect
(i) on the business, assets, properties, results of operations,
financial condition, or (insofar as they can reasonably be foreseen)
prospects of such party and its Subsidiaries, taken as a whole, or
(ii) on the consummation of the Merger. The word "Subsidiary" or
"Subsidiaries" when used in this Agreement with respect to any party
means any bank, corporation, partnership, limited liability company,
or other organization, whether incorporated or unincorporated, which
is consolidated with such party for financial reporting purposes.
2.7 LOAN PORTFOLIO AND DELINQUENT LOANS.
(a) The loans contained in the loan portfolio of the Bank
are evidenced by promissory notes or other evidences of indebtedness,
which, with all ancillary security documents, constitute valid and
binding obligations of the Bank and, to the best of First Financial's
knowledge, each of the other parties thereto, enforceable in
accordance with their terms except as limited by applicable
bankruptcy, insolvency, moratorium or other similar laws affecting the
enforcement of creditors' rights and remedies generally and by
applicable laws or principles of equity that may affect the
availability of equitable remedies. No party liable to the Bank with
respect to such loans has notified the Bank regarding any defense,
set-off or counterclaim and to the best of First Financial's knowledge
none of such loans is subject to any defense, set-off or counterclaim,
and all such loans which are secured, as evidenced by the ancillary
security documents, are so secured by valid and enforceable liens.
(b) Except as set forth in SCHEDULE 2.7(b), neither First
Financial nor any First Financial Subsidiary is a party to any written
or oral loan agreement, note or borrowing arrangement the unpaid
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principal balance of which exceeds $25,000 and as to which the
obligator is more than 90 days delinquent in payment of principal and
interest or on which First Financial or any First Financial Subsidiary
has stopped accruing interest.
(c) The Bank's allowance for loan losses as of the date
hereof has been calculated in accordance with prudent and customary
banking practices and is adequate to reflect the risk inherent in the
Bank's loan portfolio.
2.8 NO ADVERSE CHANGES. Other than as specifically disclosed in
this Agreement, the First Financial Financial Statements, the
schedules or exhibits provided for herein, or any other writing
delivered to Blackhawk, since December 31, 1997, there has not
occurred any material adverse change or any condition, event,
circumstance, fact or occurrence (other than changes resulting from or
attributable to changes in laws, regulations and generally accepted
accounting principles or interpretations) that may reasonably be
expected to result in a Material Adverse Effect on First Financial.
2.9 CONDUCT OF BUSINESS IN NORMAL COURSE. The business of First
Financial has, since December 31, 1997, been conducted only in the
ordinary and usual course consistent with past practice.
2.10 PROPERTIES AND ASSETS. The assets reflected in the most
recent of the First Financial Financial Statements or identified in
this Agreement or the schedules or exhibits provided for herein
include substantially all of the assets owned by First Financial,
except for those subsequently disposed of for fair value or otherwise
abandoned or disposed of as worthless in the ordinary course of
business. First Financial has a valid right to use or a valid
leasehold interest in, all real property used by it in the conduct of
its business as it is now being conducted, subject to no mortgage,
pledge, lien, option, conditional sale agreement, encumbrance,
security interest, title exceptions or restrictions or claim or charge
of any kind except for (i) liens for taxes not yet due and payable,
(ii) rights of other parties under leases or other arrangements by
which First Financial uses such real property, and (iii) minor
imperfections of title none of which is substantial in amount,
materially detracts from the value or impairs First Financial's
present use of the property. To the best of First Financial's
knowledge, all material certificates, licenses, and permits required
for the lawful use and occupancy of such real property by First
Financial, have been obtained and are in full force and effect. All
material tangible personal property owned by First Financial, or used
by it in its business and necessary for the operation of its business,
is in good working condition, normal wear and tear excepted. A legal
description of all real property currently owned or leased by First
Financial and its Subsidiaries, including properties held by its
Subsidiaries as a result of foreclosure or repossession or carried on
First Financial's books as "real estate owned", has been provided as
SCHEDULE 2.10 of the First Financial Disclosure Schedules.
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2.11 INSURANCE. First Financial has furnished Blackhawk with a
Schedule of Insurance that sets forth a complete and correct list of
all policies of insurance in which First Financial is named as an
insured party, which otherwise relate to or cover any assets,
properties, premises, operations and personnel of First Financial or
which is owned or carried by First Financial. First Financial has in
full force and effect the policies of insurance set forth in such
Schedule. There has been no notice given by any party of interest in
or to any such policies claiming any breach or violation of any
provisions thereof, disclaiming or denying any coverage thereof, or
canceling or threatening cancellation of any such insurance contracts.
First Financial's policies of insurance comply with the requirements
of any contracts binding on First Financial or its Subsidiaries
relating to its assets or properties. First Financial believes that
such insurance is reasonably sufficient to protect it from risks
associated with the operation of its business.
2.12 LITIGATION AND COMPLIANCE WITH LAWS. First Financial and
the Bank, and, to the best of First Financial's knowledge, the Bank's
institution-affiliated parties (as defined in 12 U.S.C. Section
1813(u)), are each in substantial compliance with all material
applicable federal, state, county and municipal laws and regulations
(a) that regulate or are concerned in any way with the business of
banking or acting as a fiduciary, including those laws and regulations
relating to the investment of funds, the taking of deposits, the
extension of credit, the collection of interest, and the location and
operation of banking facilities or (b) that otherwise relate to or
affect the business or assets of the Bank or the assets owned, used or
occupied by it. Except as disclosed in SCHEDULE 2.12, (i) there are
no claims, actions, suits, orders or proceedings pending, or, to the
knowledge of First Financial, threatened against First Financial or
the Bank, or, to the knowledge of First Financial, the Bank's
institution-affiliated parties (in their capacities as such), at law
or in equity, or before any federal, state, municipal or other
governmental authority, or before any arbitrator or arbitration panel,
whether by contract or otherwise, and (ii) there is no decree,
judgment, order or supervisory agreement in existence against or
restraining First Financial or the Bank, or any of the Bank's
institution-affiliated parties from taking any actions of any kind in
connection with the business of First Financial or the Bank, as the
case may be. First Financial has not received from any regulatory
authority any notice of, nor to the knowledge of First Financial does
there exist any threat of, enforcement actions.
2.13 CONFLICT OF INTEREST TRANSACTIONS. Except as reflected in
SCHEDULE 2.13, no executive officer or director of First Financial, or
holder of 10% or more of the common stock of First Financial, or any
member of the immediate family of any such person has, since December
31, 1997, been involved in any transaction with First Financial
(excluding transactions in deposit accounts) that involves an amount
in excess of $15,000 or has been involved in any other material
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transaction with First Financial or has had loans or any commitment to
loan outstanding from the Bank involving in excess of $15,000.
2.14 SIGNIFICANT CONTRACTS. SCHEDULE 2.14 sets forth a Schedule
of Significant Contracts, and completely and accurately lists the
following contracts, commitments or arrangements (whether written or
oral) under which First Financial is obligated on the date hereof:
(a) All consulting arrangements, and contracts for
professional and other services, including those under which First
Financial performs services for others, that are not terminable by
First Financial without damages or penalty with thirty (30) days
notice;
(b) All leases of real estate or personal property,
exclusive of leases of personal property whereunder total annual
rentals are, in each instance, less than $5,000;
(c) All contracts, commitments and agreements for the
purchase, acquisition, development, sale or disposition of real or
personal property, exclusive of conditional sales contracts and
security agreements for the acquisition of personal property
whereunder total future payments are, in each instance, less than
$5,000;
(d) All employee benefit plans (as defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974 ("ERISA"))
under which First Financial or the Bank has or may have any obligation
("First Financial ERISA Plans"), and all employment contracts,
supplemental executive agreements, severance agreements and all other
employee compensation arrangements and all other bonus, deferred
compensation, pension, retirement, salary continuation agreements,
profit sharing, stock option, stock purchase, stock appreciation and
other employee benefit plans, formal or informal, under which First
Financial or the Bank has or may have any obligation ("First Financial
non-ERISA Plans") and, together with the First Financial ERISA Plans,
the "First Financial Benefit Plans");
(e) All outstanding loans, loan commitments, letters of
credit or other financial accommodations, including modification or
amendments thereof, extended by the Bank for the benefit of others
wherein the total loan and/or commitment of the Bank exceeds
$200,000;
(f) All union and other labor contracts;
(g) All agreements, contracts, mortgages, loans, deeds of
trust, leases, commitments, indentures, notes, instruments and other
arrangements, which are with officers or directors of First Financial,
any affiliates of First Financial within the meaning of Section 23A of
the Federal Reserve Act, or any record or beneficial owner of 10% or
more of the common stock of First Financial, excepting any ordinary
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and customary banking relationships that comply with applicable
banking regulations; and
(h) Each other material contract to which First Financial
is a party or under which it is obligated made other than in the usual
or ordinary course of business and which is not terminable by First
Financial without damages or penalty with thirty (30) days notice.
2.15 NO DEFAULTS. To the best of its knowledge, First Financial
has fulfilled and taken all action reasonably necessary to date to
enable it to fulfill when due, all material obligations under all
contracts, commitments and arrangements to which it is a party, and
there are no material defaults and no events have occurred that, with
the lapse of time or election of any other party, will become material
defaults by it under any such contracts, commitments or arrangements.
2.16 ADDITIONAL SCHEDULES. The following additional schedules
are attached hereto: (a) SCHEDULE 2.16(a), which is a Real Estate
Schedule describing all real estate owned by or in which First
Financial has any interest as of the date of this Agreement, or which
is the subject of pending foreclosure proceedings by First Financial,
indicating in each case whether such real estate is improved and the
nature of any material encumbrances or defects of title of which First
Financial has knowledge; and (b) SCHEDULE 2.16(b), which is a
Securities Schedule of all investment securities owned by First
Financial as of March 31, 1998. Such schedules are complete and
correct.
2.17 TAXES. No application for extension of time for filing any
tax return or consent to any extension of time for filing any tax
return or consent to any extension of the period of limitations
applicable to the assessment or collection of any tax is in effect
with respect to First Financial, and all tax returns and information
returns required to be filed by First Financial with the United States
or any state or local government unit have been, and until the Closing
will have been, timely filed. First Financial is not delinquent in
the payment of any taxes claimed to be due by any taxing authority and
adequate provisions for taxes have been made on its books. None of
First Financial's federal or state income tax returns is being
examined by the appropriate federal or state agency. First Financial
has not received any notice of any proposed deficiency for any duty,
tax, assessment or governmental charge, and there are no pending
claims with respect thereto. First Financial is a member of a
consolidated group for purposes of the Internal Revenue Code of 1986,
as amended (the "Code").
2.18 EMPLOYEE COMPENSATION AND BENEFIT PLANS. To the best of
First Financial's knowledge, each of the First Financial Benefit Plans
has been administered, in all material respects, in compliance with
its terms and the requirements of applicable law. First Financial
does not maintain any First Financial Benefit Plan nor has it entered
into any document, plan or agreement, other than the First Financial
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Option Plans, the Recognition and Retention Plans (as defined in
SECTION 4.18(d)), an employment agreement with Steven C. Derr,
severance agreements with Steven C. Derr, Keith D. Hill, Robert W.
Opperman and Donald J. Kucera, and supplemental executive agreements
with Messrs. Derr and Hill relating to "gross up" for any excess
parachute amounts under Section 280G of the Code, which contains,
directly or indirectly, any change in control provisions that would
cause an increase or acceleration of benefits or benefit entitlements
to employees or former employees of First Financial or their
respective beneficiaries, or other event that would cause an increase
in liability to First Financial as a result of the transactions
contemplated by this Agreement. First Financial does not have and has
not had any First Financial Benefit Plans which are subject to Title
IV of ERISA. Neither First Financial nor any of its affiliates, its
employees, directors or agents, or any fiduciary, has engaged in any
"Prohibited Transaction" (as defined in Section 406 of ERISA or
4975(c)(1) of the Code) that is not exempt under Section 4975(c)(l) or
(d) of the Code or Section 407 or 408 of ERISA with respect to any
First Financial ERISA Plan. Each First Financial ERISA Plan that is
intended to be qualified under Section 401 and related provisions of
the Code is the subject of a determination letter from the Internal
Revenue Service to the effect that it is so qualified under the Code.
No matter is pending relating to any First Financial Benefit Plan
before any court or governmental agency. Neither First Financial, nor
any of its affiliates is, or has ever been, obligated to contribute to
a multiemployer plan (as defined in Section 3(37) of ERISA). Except
as required pursuant to the Consolidated Omnibus Budget Reconciliation
Act of 1985, Section 4980B of the Code and Section 601 of ERISA or as
reflected on SCHEDULE 2.18 delivered pursuant hereto, neither First
Financial, nor any other party on behalf of First Financial, has any
obligation or commitment to provide health, disability, or life
insurance or similar welfare benefits to former employees or members
of their families.
2.19 AUTHORIZATION OF TRANSACTIONS. The execution, delivery and
performance of this Agreement by First Financial have been duly
authorized by the Board of Directors of First Financial. Subject to
approval by the stockholders of First Financial as contemplated by
SECTION 5.1(d) hereof, First Financial has full corporate power to
execute, deliver and perform this Agreement and to consummate the
transactions herein contemplated, and such execution, delivery and
performance does not violate any provisions of the Certificate of
Incorporation or bylaws of First Financial or the charter or bylaws of
the Bank or any orders, agreements or directives to which First
Financial or the Bank is a party or is otherwise bound. Except for
the regulatory approvals referred to in SECTION 5.1(c) or approval of
stockholders referred to in SECTION 5.1(d) hereof, no consent of any
regulatory authority or other person is required to be obtained by
First Financial in order to permit First Financial to perform its
obligations hereunder or to permit consummation of the Merger.
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2.20 ENVIRONMENTAL SUITS AND PROCEEDINGS. There is no action,
suit or other proceeding, ruling, order, or citation involving First
Financial or any of its assets, existing now or previously asserted
nor is there any investigation, liability or inquiry pending or, to
the knowledge of First Financial, threatened.
2.21 CONTAMINATED PROPERTIES. As of the date hereof:
(a) Except as disclosed in SCHEDULE 2.21, none of the
properties owned or leased by First Financial or, to the knowledge of
First Financial, held by First Financial as a fiduciary for the
account of others, or which collateralize any outstanding material
loan or line of credit, whether or not such loan or line of credit is
or has been in default, is contaminated with any wastes or hazardous
substances, as defined below, except in compliance with Environmental
Laws, as defined in SECTION 4.23.
(b) First Financial neither is nor may it be deemed to be
an "owner or operator" of a "facility" or "vessel" which owns,
possesses, transports, generates, or disposes of a "hazardous
substance," as those terms are defined in Section 9601 of the
Comprehensive Environmental Response Compensation and Liability Act of
1980 and which would subject it to any liability under such Act.
2.22 CHANGE IN BUSINESS RELATIONSHIPS. Except as described in
writing to Blackhawk, First Financial has no actual notice, whether on
account of this Agreement or otherwise, that any customer, agent,
representative or supplier intends to discontinue, diminish, or change
its relationships with First Financial, the effect of which would have
a Material Adverse Effect on First Financial.
2.23 BROKER'S AND FINDER'S FEES. First Financial has not
incurred any obligation or liability, contingent or otherwise, for any
brokerage commission or finder's fee or like compensation in respect
of the transactions contemplated hereunder except for fees and
expenses that may be owed to Howe Barnes Investments, Inc. for
investment banking services.
2.24 YEAR 2000 COMPLIANCE. The Bank is in compliance in all
material respects with the Year 2000 guidelines of the Federal
Financial Institutions Examination Counsel as set forth in its
Interagency Statement dated May 5, 1997. SCHEDULE 2.24 lists the
documents the Bank has provided to Blackhawk that relate to the Bank's
compliance with the Interagency Statement, and all such documents are
true, correct and complete in all material respects as of the date
hereof.
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ARTICLE III
STATEMENTS OF ESSENTIAL FACTS CONCERNING BLACKHAWK
AND
ACQUISITION CORP.
This Agreement is entered into by First Financial upon the
understanding, and Blackhawk and Acquisition Corp. represent and
warrant, that the following Statements of Essential Facts, being the
only representations or warranties made to First Financial by or on
behalf of Blackhawk and Acquisition Corp. in connection with the
transactions contemplated by this Agreement, are true and correct on
the date of this Agreement:
3.1 CORPORATE EXISTENCE. Blackhawk is a corporation duly
organized and validly existing under the laws of the State of
Wisconsin and has the corporate power and authority to own its
property and assets and to carry on its business as now being
conducted. Acquisition Corp. is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware,
and Blackhawk owns all of the issued and outstanding voting stock of
Acquisition Corp.
3.2 FINANCIAL STATEMENTS. Blackhawk has furnished First
Financial true and complete copies of its Consolidated Balance Sheet,
Statements of Income, Statements of Cash Flow and Statements of
Stockholders' Equity at and for the years ended December 31, 1997,
1996 and 1995 (collectively, "Blackhawk Financial Statements"). The
Blackhawk Financial Statements are audited and have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis, and, together with the notes thereto, present fairly
the financial position of Blackhawk at the dates shown and the results
of operations for the periods then ended.
3.3 AUTHORIZATION OF TRANSACTIONS. The execution, delivery and
performance of this Agreement by Blackhawk have been duly authorized
by the Board of Directors of Blackhawk, this being the only
authorization required under Blackhawk's Articles of Incorporation,
its bylaws, or governing statutes. Blackhawk has full corporate power
to execute, deliver and perform this Agreement and to consummate the
transactions herein contemplated, and such execution, delivery and
performance does not violate any provisions of the Articles of
Incorporation of Blackhawk, its bylaws, or any orders, agreements or
directives to which Blackhawk is a party or is otherwise bound. The
execution, delivery and performance of this Agreement by Acquisition
Corp. have been duly authorized by the Board of Directors of
Acquisition, this being the only authorization required under
Acquisition Corp.'s Certificate of Incorporation, its bylaws, or
governing statutes. Blackhawk, in its capacity as the sole
stockholder of Acquisition Corp., has approved this Agreement as
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required by the DGCL. Except for the regulatory approvals referred to
in SECTION 5.1(c) hereof, no consent of any regulatory authority or
other person is required to be obtained by Blackhawk in order to
permit Blackhawk to perform its obligations hereunder or to permit
consummation of the Merger.
3.4 FINANCIAL RESOURCES. Blackhawk has the financial
wherewithal, whether by using its internal funds, external financing,
or both, to perform its obligations under this Agreement. Blackhawk
and its Subsidiaries are, and will be following the Merger, in
compliance with all applicable capital, debt and financial and non-
financial criteria of state and federal banking agencies having
jurisdiction over them. Blackhawk has no knowledge of any facts or
conditions applicable to it or its Subsidiaries that would reasonably
lead Blackhawk to believe the Merger will not be approved by the Board
of Governors of the Federal Reserve System (the "Federal Reserve") and
any other state or federal banking agencies having jurisdiction over
the transactions contemplated hereby or that such approvals would be
delayed.
ARTICLE IV
ADDITIONAL AGREEMENTS
4.1 CONDUCT OF BUSINESS OF FIRST FINANCIAL. Between the date
hereof and the Closing Date, First Financial shall conduct its
business and shall cause the Bank to conduct its business in the usual
and ordinary course consistent in all material respects with prudent
banking practices. Without limiting the foregoing, without the prior
written consent of Blackhawk:
(a) First Financial shall, and shall cause the Bank to,
make no changes in their respective charter or bylaws or in the number
of issued and outstanding shares, except for changes resulting from
the exercise of existing Options in accordance with their terms;
(b) First Financial shall, and shall cause the Bank to, not
increase the compensation of their directors, officers or employees
except consistent with prior practice and not to exceed 4% in any
given case, and not award or pay bonuses to directors, officers or
employees except consistent with prior practice and in any event not
to exceed $23,000 in the aggregate for all directors, officers and
employees; provided, however, that notwithstanding the limitation in
this SECTION 4.1(b) concerning paying bonuses to directors, Blackhawk
agrees that First Financial may pay a bonus on the Closing Date in an
amount up to $15,000 to its Chairman of the Board in consideration for
the services rendered by the Chairman to First Financial in connection
with the Merger and such amount shall not be counted in determining
the aggregate bonuses paid to directors, officers and employees for
purposes of the $23,000 limit.
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(c) First Financial shall, and shall cause the Bank to,
make no loan for $250,000 or more (including aggregation of loans to
any one customer or related entities) except for loans currently
committed to be made pursuant to written commitment letters, and First
Financial shall, and shall cause the Bank to, make no other loans, or
renewals or restructuring of loans except in the ordinary course of
business and consistent in all material respects with prudent banking
practices and policies and applicable rules and regulations of federal
or state banking agencies ("Regulatory Authorities") with respect to
amount, terms, security and quality of the borrower's credit;
(d) First Financial shall not declare or pay any stock
dividend, cash dividend or other distribution without the prior
written consent of Blackhawk;
(e) First Financial shall, and shall cause the Bank to, use
their best efforts to maintain their present insurance coverage in
respect of their respective properties and businesses;
(f) First Financial shall, and shall cause the Bank to,
make no significant changes, outside the ordinary course of business,
in the general nature of the business conducted by First Financial and
the Bank, including but not limited to the investment or use of their
assets, the liabilities they incur, or the facilities they operate;
(g) First Financial shall, and shall cause the Bank to, not
enter into any employment, consulting or other similar agreements that
are not terminable on 30 days' notice or less without penalty or
obligation (beyond the notice period of 30 days or less);
(h) First Financial shall, and shall cause the Bank to, not
take any action that would result in a termination, partial
termination, curtailment, discontinuance or merger into another plan
or trust of any First Financial Benefit Plan, except as provided in
this Agreement;
(i) First Financial shall, and shall cause the Bank to,
timely file all required tax returns with all applicable taxing
authorities and will not make any application for or consent to any
extension of time for filing any tax return or any extension of the
period of limitations applicable thereto;
(j) Except as already reflected in the Financial
Statements, First Financial shall, and shall cause the Bank to, not
make any expenditure for fixed assets in excess of $10,000 for any
single item, or $25,000 in the aggregate, or enter into any lease of
fixed assets; provided, however, that this paragraph (j) shall not
apply to expenditures for fixed assets already contracted for as of
the date hereof relating to the Bank's Rockford facility which
amounted to $41,926;
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(k) First Financial shall, and shall cause the Bank to, not
incur any liabilities or obligations, make any commitments or
disbursements, acquire or dispose of any property or asset, make any
contract or agreement, or engage in any transaction, except in the
ordinary course consistent in all material respects with prudent
banking practices;
(l) First Financial shall, and shall cause the Bank to,
only purchase or invest in instruments permitted by the Bank's
investment policy, including, but not limited to, obligations of the
government of the United States, agencies of the United States or
mortgage-backed securities, and to not execute individual investment
transactions of greater than $525,000;
(m) First Financial shall, and shall cause the Bank to,
make no changes of a material nature in their accounting procedures,
methods, policies or practices or the manner in which they conduct
their businesses and maintain their records;
First Financial shall, and shall cause the Bank, not to
borrow funds from third parties and, in turn, invest such funds in
assets other than loans that the Bank originates; and
(o) First Financial shall use its best efforts to assist
Blackhawk in the sale of the "Miller & Schroeder" loans owned by
either First Financial or the Bank, all of which loans are set forth
on SCHEDULE 4.1(o). Neither a contract of sale shall be entered into
nor shall the consummation of the sale of such loans occur until after
the Effective Time unless otherwise agreed to by First Financial, and
such sale after the Effective Time shall not affect the calculation of
the Merger Price set forth in SECTION 1.1(f).
4.2 CONDUCT OF BUSINESS OF BLACKHAWK. Between the date hereof
and the Closing Date, the business of Blackhawk shall be conducted
(and Blackhawk shall cause the business of its Subsidiaries to be
conducted) in the usual and ordinary course consistent in all material
respects with prudent banking practices and in a manner that will not
adversely affect Blackhawk's ability to obtain all necessary
regulatory approvals for the transactions contemplated hereby or
Blackhawk's ability to perform its obligations under this Agreement.
4.3 ACCESS TO INFORMATION AND ATTENDANCE AT BOARD MEETINGS.
Pending the Closing, First Financial shall (a) give Blackhawk and its
representatives full access to further information (including, but not
limited to, records, files, correspondence, tax work papers and audit
work papers) with respect to First Financial (other than records,
files, correspondence and findings of the Board of Directors related
to the possible sale of First Financial), (b) supply to Blackhawk and
its representatives, as soon as they become available, all reports on
loans and investments of First Financial, month-end prepared balance
sheets and profit and loss statements, internal and external audit
reports and such other reports of First Financial that Blackhawk may
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reasonably request, and (c) to the extent permissible under law,
transmit to Blackhawk copies of all notices, minutes, consents, Board
packages and other materials that First Financial and the Bank provide
to their respective directors, other than materials relating to any
possible sale of First Financial or the Bank. Blackhawk shall use
such information solely for the purpose of conducting business, legal
and financial reviews of First Financial and for such other purposes
as may be related to this Agreement. Pending the Closing,
representatives of Blackhawk shall, during normal business hours and
on reasonable advance notice to First Financial, be given full access
to First Financial's records and business activities and afforded the
opportunity to observe its business activities and consult with its
directors and officers regarding the same on an ongoing basis (without
limiting the foregoing, to verify compliance by First Financial with
all terms of this Agreement), provided that the foregoing do not
interfere with the business operations of First Financial.
Furthermore, pending the Closing, a director or senior officer of
Blackhawk may attend meetings of the Boards of Directors of First
Financial and the Bank, and First Financial and the Bank shall give
Blackhawk reasonable advance notice of the date, place and time of
such meetings; provided, however, that First Financial and the Bank
shall have the right to exclude the Blackhawk representative from any
meeting or any portion of a meeting during which the sale of First
Financial or the Bank is expected to be discussed. Notwithstanding
this SECTION 4.3 and other than as set forth in this Agreement, the
management of First Financial and the authority to establish and
implement its business policies shall reside solely in First
Financial's officers and Board of Directors.
4.4 FIRST FINANCIAL STOCKHOLDERS' MEETING. As soon as
practicable following the execution and delivery of this Agreement by
the parties hereto, First Financial shall call and hold a meeting of
its stockholders (the "Stockholders Meeting") to act upon and consider
this Agreement and the transactions contemplated herein in accordance
with its Certificate of Incorporation, its bylaws, and the applicable
statutes of the State of Delaware. First Financial, acting through
its Board of Directors, shall recommend to its stockholders,
consistent with its fiduciary duties, approval of this Agreement and
the Merger.
4.5 FIRST FINANCIAL PROXY MATERIALS. (a) As soon as practicable
following the execution and delivery of this Agreement by the parties
hereto, First Financial shall prepare and mail to the holders of the
First Financial Shares appropriate proxy materials (the "Proxy
Materials"), including a notice of the meeting, proxy statement and
form of proxy that comply with applicable laws and regulations.
Blackhawk shall furnish to First Financial all information concerning
Blackhawk required for inclusion in the Proxy Materials, and all such
information shall be true and correct in all material respects without
omission of any material fact required to be stated to make the
information stated therein not misleading. In the Proxy Materials,
First Financial shall present this Agreement and the transactions
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contemplated hereby for approval by the holders of the First Financial
Shares at the Stockholders Meeting. Before the Proxy Materials are
filed with the SEC and again before the materials are mailed to the
holders of the First Financial Shares, First Financial's legal counsel
shall deliver a copy of such materials to Blackhawk's legal counsel,
and Blackhawk's legal counsel shall have a reasonable amount of time
to review such materials before filing or mailing, as the case may be.
4.6 REASONABLE EFFORTS. The parties to this Agreement agree to
use their reasonable efforts in good faith to satisfy the various
conditions to Closing and to consummate the Merger as soon as
practicable. None of the parties hereto shall intentionally take or
intentionally permit to be taken any action that would be in breach of
the terms or provisions of this Agreement or that would cause any of
the representations contained herein to be or become untrue.
4.7 REGULATORY APPROVALS. Within thirty (30) calendar days
after the date of this Agreement, Blackhawk shall make all appropriate
initial filings necessary to obtain the regulatory approvals referred
to in SECTION 5.1(c) hereof, and First Financial shall cooperate fully
in the process of obtaining all such approvals. Blackhawk shall
provide First Financial and its legal counsel with copies of all
applications when filed and all correspondence, notices and approvals
when received.
4.8 BUSINESS RELATIONS AND PUBLICITY. First Financial shall use
reasonable efforts to preserve its reputation and relationships with
suppliers, clients, depositors, customers, employees and others having
business relations with First Financial. No press release or other
communication in connection with or relating to this Agreement or the
transactions contemplated hereby (other than communications with
appropriate regulatory authorities) shall be issued or made without
the prior mutual consent of the parties hereto; provided, however,
that either party may release information in connection with or
relating to this Agreement or the transactions contemplated hereby if
the party releasing the information believes such release is required
by law.
4.9 LOAN REVIEW. Prior to the Closing, Blackhawk and its
representatives shall be entitled to periodically review the Bank's
loan portfolio, and shall be furnished with full information regarding
the status of each loan contained therein.
4.10 NO CONDUCT INCONSISTENT WITH THIS AGREEMENT.
(a) First Financial agrees that it will not, during the
term of this Agreement, (i) solicit, encourage or authorize or take
any other action to facilitate any inquiries or proposals that
constitute, or may be reasonably expected to lead to, any Transaction
Proposal, as defined below, or discuss or negotiate with any Person,
as defined below, in furtherance of such inquiries or to obtain a
Transaction Proposal, or agree to or endorse any Transaction Proposal,
or authorize or permit any of its officers, directors, or employees or
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any investment banker, financial advisor, attorney, accountant, or
other representative retained by it or any of its Subsidiaries to take
any such action; provided, however, that the Board of Directors of
First Financial may, in response to an unsolicited written proposal
from a third party regarding a Superior Proposal, as defined below,
furnish or cause to be furnished information to and engage in
discussions with such third party, but only if the Board of Directors
of First Financial shall determine in good faith and based upon an
opinion of its outside counsel that failure to take such action could
be reasonably expected to result in a breach of the fiduciary duties
of such Board under applicable law. In the event that the Board
furnishes information to or engages in such discussions with any
Person, First Financial shall promptly notify Blackhawk orally and in
writing of all of the relevant details relating to all inquiries and
proposals that it may receive relating to any of such matters and
provide Blackhawk with copies of all materials delivered to such
Person.
(b) As used herein, "Superior Proposal" means a bona fide,
written and unsolicited proposal or offer made by any Person with
respect to a Transaction Proposal, as defined below, on terms that the
Board of Directors of First Financial determines in good faith, and in
the exercise of its reasonable judgment, based on the advice of
independent financial advisors and legal counsel, to be more favorable
to First Financial and its stockholders than the transactions
contemplated by this Agreement.
(c) "Transaction Proposal" as used in this Agreement means
(in each case other than transactions contemplated hereby) (A) a bona
fide tender offer or exchange offer for 25% or more of the then out-
standing First Financial Shares that shall have been publicly proposed
to be made or shall have been commenced or made by any Person; (B) a
merger, consolidation, or other business combination with First
Financial, or with any of the Subsidiaries of First Financial, which
shall have been effected by any Person, or an agreement relating to
any such transaction which shall have been entered into; (C) any sale,
lease, exchange, mortgage, pledge, transfer, or other disposition
(whether in one transaction or a series of related transactions)
involving a substantial part of First Financial's consolidated assets
(including any stock of the Bank), or all or a substantial part of the
assets of any of the Subsidiaries of First Financial, to any Person
which shall have been effected, or any agreement relating to such
transaction which shall have been entered into; (D) the acquisition by
any Person (other than Blackhawk or any of the Subsidiaries of First
Financial in a fiduciary capacity for third parties, none of whom
beneficially owns 10% or more of the outstanding First Financial
Shares) of beneficial ownership (within the meaning of Rule 13d-3
under the Exchange Act, which will be deemed for purposes hereof to
provide that a Person beneficially owns any First Financial Shares
that may be acquired by such person pursuant to any right, option,
warrant, or other agreement, regardless of when such acquisition would
be permitted by the terms thereof) of 25% or more of the outstanding
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First Financial Shares (including First Financial Shares currently
beneficially owned by such Person); (E) any reclassification of
securities or recapitalization of First Financial or other transaction
that has the effect, directly or indirectly, of increasing the
proportionate share of any class of equity security (including
securities convertible into equity securities) of First Financial that
is owned by any Person which shall have been effected, or any
agreement relating to such transaction which shall have been entered
into or plan with respect thereto adopted; (F) any transaction having
an effect similar to those described in (A) through (E) above; or (G)
a public announcement with respect to a proposal, plan, or intention
by First Financial or another Person to effect any of the foregoing
transactions (which may include publication of notice of filing or any
similar notice under applicable law).
(d) The term "Person" for purposes of this SECTION 4.10
shall mean any corporation (excluding Blackhawk or any of its
Subsidiaries), partnership, person or other entity or group (as
defined in SECTION 13(d)(3) of the Exchange Act).
4.11 BOARD OF DIRECTORS' NOTICES, MINUTES, ETC. First Financial
shall give reasonable notice to Blackhawk of all meetings of the Board
of Directors and Board committees of First Financial and the Bank, and
if known, the agenda for or business to be discussed at such meeting.
First Financial shall transmit to Blackhawk, promptly, copies of all
notices, minutes, consents and other materials that First Financial or
the Bank provides to their directors (except for materials relating to
the Merger) to the extent permissible under law; provided, however,
that Blackhawk agrees to hold in confidence and trust and to act in a
fiduciary manner with respect to all information so provided.
4.12 CONFIDENTIAL INFORMATION. First Financial, Blackhawk and
Acquisition shall, and shall direct all of their agents, employees and
advisors to, keep in strict confidence any information concerning the
Merger and the properties, business and assets of the other party that
may have been obtained in the course of negotiations or examination of
the affairs of the other party either prior or subsequent to the
execution of this Agreement (other than such information as shall be
in the public domain or otherwise ascertainable from public or
sources) and shall, in the event the transactions contemplated in this
Agreement are not consummated, return all documents to the other party
containing such information.
4.13 MAINTENANCE OF CAPITAL LEVELS. Blackhawk and its financial
institution Subsidiary or Subsidiaries shall maintain at least the
minimum capital levels as required by Regulatory Authorities.
4.14 NO CONTROL OF FIRST FINANCIAL BY BLACKHAWK. Other then as
set forth herein, until the Effective Time, the management of First
Financial and the authority to establish and implement its business
policies shall reside solely in First Financial's officers and Board
of Directors.
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4.15 EMPLOYEES. All employees of First Financial shall be paid
prior to the Effective Time for all accrued but unpaid bonuses,
including a pro rata bonus through the Effective Time under the Bank's
middle managers bonus plan, and accrued vacation pay.
4.16 INDEMNIFICATION AND DIRECTORS' AND OFFICERS' LIABILITY
INSURANCE. Blackhawk agrees that from and after the Effective Time it
shall indemnify and hold harmless each present and former director and
officer of First Financial and the Bank (the "Indemnified Parties")
against any costs or expenses (including reasonable attorneys' fees),
judgments, fines, losses, claims, damages or liabilities
(collectively, "Costs") incurred in connection with any claim, action,
suit, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of matters existing or
occurring at or prior to the Effective Time, whether asserted or
claimed prior to, at or after the Effective Time, to the full extent
permitted under applicable law, and First Financial shall advance
expenses as incurred to the full extent permitted under applicable
law, provided the person to whom expenses are advanced provides an
undertaking to repay such advances if it is ultimately determined that
such person is not entitled to indemnification. Blackhawk shall cause
to be maintained in effect for three years from the Effective Time for
the benefit of First Financial's current directors' and officers'
either Blackhawk's current directors' and officers' liability
insurance policy or a "tail" policy on First Financial's current
directors' and officers' liability insurance policy, in both
instances if such insurance is obtainable (provided that Blackhawk may
substitute therefor, in either case, policies of equivalent coverage
so long as no lapse in coverage occurs as a result of substitution
with respect to matters occurring prior to the Effective Time); and
provided further that Blackhawk shall not be obligated to expend for
such insurance an amount greater than 150 percent of the cost of the
most recent policy of one year, and in the event it shall cost more
than such amount for such policy, Blackhawk shall be obligated to
purchase only such insurance as may be purchased with such cost. The
cost of such insurance shall be the obligation of Blackhawk.
4.17 BOARD OF DIRECTORS OF FIRST FINANCIAL AND THE BANK. At the
Effective Time, all Directors of First Financial and the Bank shall
resign by submitting letters of resignation to Blackhawk.
4.18 EMPLOYEE BENEFIT PLANS.
(a) At the Effective Time and through at least December 31,
1998, each person who remains as an employee of First Financial and
its Subsidiaries shall remain eligible for the employee welfare plans
and other fringe benefit programs currently maintained by First
Financial and its Subsidiaries; provided that Blackhawk may, in its
discretion and after December 31, 1998, in lieu of continuing the
First Financial welfare plans substitute employee welfare plans and
other fringe benefit programs offered or maintained by Blackhawk and
its Subsidiaries on terms and conditions substantially similar in the
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aggregate to those that Blackhawk and its Subsidiaries may make
available to similarly situated officers and employees, including,
without limitation, any health, life, long-term disability, severance,
vacation or paid time off programs (the "Blackhawk Welfare Plans").
The period of employment and compensation of each employee of First
Financial and its Subsidiaries with First Financial and its
Subsidiaries shall be counted for all purposes (except for purposes of
benefit accrual) under Blackhawk's Welfare Plans, including, without
limitation, for purposes of service credit and eligibility. Any
expenses incurred by an employee of First Financial or its
Subsidiaries under First Financial's or the Bank's employee welfare
benefit plans (such as deductibles or co-payments), shall be counted
for all purposes under the Blackhawk Welfare Plans. Blackhawk shall
waive any pre-existing condition exclusions for conditions existing on
the Closing Date, and actively-at-work requirements for periods ending
on the Closing Date contained in Blackhawk's Welfare Plans as they
apply to the employees of First Financial and its Subsidiaries and
former employees and dependents.
(b) As of the Effective Time, the loan between First
Financial and the First Federal Savings Bank of Belvidere Employee
Stock Ownership Plan (the "First Federal ESOP") shall be repaid in
full with the cash consideration received from Blackhawk for the
unallocated First Financial Shares held in the First Federal ESOP in
the amount equal to the Merger Price multiplied by the number of
unallocated First Financial Shares held by the First Federal ESOP, and
any unallocated portion of the consideration remaining after such
repayment shall be allocated to the First Federal ESOP accounts of the
employees of First Financial and its Subsidiaries who are participants
and beneficiaries (such individuals hereinafter referred to as the
"ESOP Participants"), in accordance with the terms of the First
Federal ESOP as amended with respect to such termination. As soon as
practicable after all assets have been allocated, the First Federal
ESOP shall be terminated. Following the receipt of a favorable
determination letter from the Internal Revenue Service ("IRS") as to
the tax qualified status of the First Federal ESOP upon its
termination under Section 401(a) and 4975(e) of the Code (the "Final
Determination Letter"), distributions of the benefits under the First
Federal ESOP shall be made to the ESOP Participants. From and after
the date of this Agreement, in anticipation of such termination and
distribution, Blackhawk, First Financial and their respective
representatives prior to the Effective Time, and Blackhawk and its
representatives after the Effective Time, shall use their best efforts
to apply for and obtain a favorable Final Determination Letter from
the IRS. In the event that Blackhawk, First Financial and their
respective representatives, prior to the Effective Time, and Blackhawk
and its representatives after the Effective Time, reasonably determine
that the First Federal ESOP cannot obtain a favorable Final
Determination Letter, or that the amounts held therein cannot be so
applied, allocated or distributed without causing the First Federal
ESOP to lose its qualified status, First Financial prior to the
Effective Time and Blackhawk after the Effective Time shall take such
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action as they may reasonably determine with respect to the
distribution of benefits to the ESOP Participants, provided that the
assets of the First Federal ESOP shall be held or paid for the benefit
of the ESOP Participants and provided further that in no event shall
any portion of the amounts held in the First Federal ESOP revert,
directly or indirectly, to First Financial or any affiliate thereof,
or to Blackhawk or any affiliate thereof. All ESOP Participants shall
fully vest and have a nonforfeitable interest in their accounts under
the First Federal ESOP determined as of the Effective Time.
(c) At the Effective Time, the First of Belvidere Profit
Sharing Plan (the "First of Belvidere PSP") shall be continued in
effect. Thereafter, Blackhawk may elect to terminate the First of
Belvidere PSP or merge it with a tax-qualified plan maintained by
Blackhawk. If the plan merger occurs, or if First Financial employees
otherwise become eligible to participate in the Blackhawk plan, each
First Financial employee's period of employment with First Financial
or its Subsidiaries shall be counted for eligibility and vesting
purposes under the Blackhawk plan. Blackhawk acknowledges and agrees
that the Bank shall make a matching contribution to the First of
Belvidere PSP prior to or on the Closing Date in an amount equal to 3
percent of compensation earned by participants in the First of
Belvidere PSP through the Closing Date, which amount shall be accrued
for on or before the Closing Date. At the Effective Time, all
participants in the First of Belvidere PSP shall fully vest and have a
nonforfeitable interest in their accounts under the First of Belvidere
PSP determined as of the Effective Time. If the First of Belvidere
PSP is terminated, all participants shall be offered the option of a
lump-sum cash payment or, with Blackhawk's consent, the option of
rolling or transferring such amount to the Blackhawk plan, subject in
all cases to applicable provisions of the Code.
(d) Blackhawk acknowledges and agrees that First Financial
and the Bank shall be permitted to take whatever action they deem to
be reasonably necessary to provide that all Options granted under the
First Financial Option Plans and all awards granted under the First
Federal Savings Bank of Belvidere Recognition and Retention Plan and
Trust for Employees and the First Federal Savings Bank of Belvidere
Recognition and Retention Plan and Trust for Outside Directors (the
"Recognition and Retention Plans") shall be fully vested and
nonforfeitable as of the Effective Time. All awards under the
Recognition and Retention Plans to purchase 3,043 First Financial
Shares that have not been granted prior to the Effective Time shall
not be considered outstanding First Financial Shares as of the
Effective Time.
4.19 FIRST FINANCIAL EMPLOYMENT, SEVERANCE AND SUPPLEMENTAL
AGREEMENTS. Blackhawk agrees to perform and satisfy the terms of (a)
the employment agreement by and among First Financial, the Bank and
Steven C. Derr, (b) the severance agreements by and among First
Financial, the Bank and each of Steven C. Derr, Keith D. Hill, Robert
W. Opperman and Donald J. Kucera, respectively, (c) the supplemental
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executive agreements relating to "gross up" for any excess parachute
amounts under Section 280G of the Code by and among First Financial,
the Bank and Messrs. Derr and Hill, and (d) the executive salary
continuation agreement by and between the Bank and David L. Beasley,
all as in effect on the date hereof. Blackhawk agrees that the
transactions contemplated by this Agreement constitute a change in
control of First Financial for purposes of these agreements where
applicable.
4.20 LEASE AGREEMENT FOR ROCKFORD BRANCH. Between the date of
this Agreement and the Closing Date, First Financial shall use its
reasonable best efforts to lease the entire second floor space of its
Rockford, Illinois branch office on such terms and conditions as are
acceptable to Blackhawk. First Financial shall inform Blackhawk from
time to time concerning its progress in leasing the space. Any lease
of the second floor space prior to the Closing Date shall be subject
to the approval of Blackhawk.
4.21 SUBSIDIARY BANK MERGER. First Financial and Blackhawk agree
to cooperate and to take such steps as may be necessary to obtain all
requisite regulatory, corporate and other approvals for the Bank
Merger, subject to consummation of the Merger, to be effective
concurrently with the Merger or as soon as practicable thereafter.
The Surviving Bank shall be BSB, and shall continue to be known as
"Blackhawk State Bank." In furtherance of such agreement, each of
First Financial and Blackhawk agrees:
(a) to cause the board of directors of the Bank and BSB,
respectively, to approve the Bank Merger and to submit it to the sole
stockholder of each bank for its approval;
(b) to vote the shares of stock of the Bank and BSB owned
by them in favor of the Bank Merger; and
(c) to take, or cause to be taken, all steps necessary to
consummate the Bank Merger concurrently with or as soon as is
practicable after consummation of the Merger.
The Bank Merger shall be accomplished pursuant to a merger agreement
containing such terms and conditions as are ordinary and customary for
affiliated bank merger transactions of such type. Immediately after
the Effective Time, the officers of the Surviving Corporation shall
take, or cause to be taken, whatever additional steps may be necessary
to effectuate the Bank Merger.
4.22 STOCKHOLDER VOTING AGREEMENTS. Within fifteen (15) calendar
days of the date of this Agreement, First Financial shall obtain and
deliver to Blackhawk a Stockholder Voting Agreement, in the form
attached hereto as EXHIBIT B, executed by each stockholder of First
Financial who is a director of First Financial and Mr. Perry B.
Hansen.
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4.23 ENVIRONMENTAL AUDITS/REMEDIATION.
(a) Blackhawk shall have the right to engage an
environmental consulting engineering firm, reasonably acceptable to
First Financial, to perform environmental site assessments of the
owned or leased real properties of First Financial or its Subsidiaries
(collectively, the "Audited Properties"), which shall satisfy the
American Society of Testing and Materials "Standard Practice for
Environmental Site Assessments: Phase I Environmental Site Assessment
Process" (ASTM Designation: E-1527-93), except that such assessment
shall also include a review of compliance with Environmental Laws, as
defined below (the "Environmental Audits"), and render reports of the
Environmental Audits (the "Environmental Reports") to determine
whether there are any indications or evidence that (i) any toxic
substance has been stored, deposited, treated, recycled, used or
accidentally or intentionally disposed of, discharged, spilled,
released, dumped, emitted or otherwise placed on, under or at, or used
in any construction on, any such Audited Property, (ii) any such
Audited Property is contaminated by or contains any toxic substance or
(iii) any violations of Environmental Laws have occurred or are likely
to occur on any Audited Property. The scope of the Environmental
Audits may also include any testing or sampling of materials to
determine, to Blackhawk's reasonable satisfaction, whether any clean
up, removal, remedial action or other response ("Remediation Action")
is required to bring the Audited Properties into material compliance
with Environmental Laws or to eliminate any condition that could
result in a material liability as a result of the ownership, lease,
operation or use of any Audited Property, and the estimated cost of
such Remediation Action (the "Remediation Costs"). All Environmental
Audits shall initially be provided to Blackhawk and First Financial in
draft form. Blackhawk shall require that the environmental consulting
firm not disclose (except as required by law) any information in the
Environmental Audits to anyone other than Blackhawk and First
Financial. Blackhawk will use reasonable efforts to engage an
environmental consulting engineering firm within five (5) days of the
date hereof and Blackhawk will use reasonable efforts to cause the
Phase I Environmental Audits to be completed within twenty five (25)
days of the date hereof. Within five (5) days of the receipt of the
Phase I Environmental Audit by Blackhawk, Blackhawk shall determine
whether, in its reasonable judgment, a Phase II Environmental Audit is
necessary and shall notify First Financial of its determination in
this regard. If Blackhawk desires to cause a Phase II Environmental
Audit to be conducted, Blackhawk shall use its best efforts to cause
the environmental consulting engineering firm which performed the
Phase I Environmental Audit, or another firm reasonably acceptable to
First Financial, to commence such Phase II Environmental Audit within
such five (5) day period. Such Phase II Environmental Audit shall be
completed not later than fifty (50) days after the date hereof. First
Financial agrees to cooperate with Blackhawk's environmental
consultant. Blackhawk shall be solely responsible for all costs
associated with the Environmental Reports. As used in this Agreement,
the term "Environmental Laws" shall mean all applicable federal,
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state, and local environmental laws relating to pollution or
protection of the environment including, without limitation, the Solid
Waste Disposal Act, the Hazardous Materials Transportation Act, the
Clean Water Act, the Clean Air Act, the Resource Conservation and
Recovery Act, the Toxic Substances Control Act, the Occupational
Safety and Health Act and the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, their state and
local laws, their state and local law counterparts and all rules and
regulations promulgated thereunder.
(b) In the event that the Environmental Audits disclose the
need for any remediation at any of the Audited Properties, First
Financial shall either: (i) cause an environmental engineering firm
reasonably acceptable to Blackhawk to perform such required
remediation in a manner reasonably acceptable to Blackhawk, the full
cost of which shall be paid for by First Financial and shall be
expensed or accrued on or before the Effective Time of the Merger and
shall be used to calculate the Closing Equity set forth in SECTION
1.1(f) hereof; or (ii) notify Blackhawk that it will not perform such
remediation, in which case Blackhawk shall have the right to terminate
the Merger and this Agreement as set forth in SECTION 6.5(g).
ARTICLE V
CONDITIONS PRECEDENT
5.1. CONDITIONS PRECEDENT TO OBLIGATIONS OF BLACKHAWK. Unless
the conditions are waived by Blackhawk or Acquisition Corp., all
obligations of Blackhawk and Acquisition Corp. under this Agreement
are subject to the fulfillment, prior to or at the Closing, of each of
the following conditions:
(a) STATEMENTS OF ESSENTIAL FACTS; PERFORMANCE OF
AGREEMENTS. The Statements of Essential Facts of First Financial
contained in Article II of this Agreement, as amended or supplemented
by the First Financial Updated Statements (as defined in SECTION
5.1(j) hereof) and the representations and warranties of First
Financial contained in the First Financial Financial Statements or in
any documents, certificates, schedules or exhibits delivered by First
Financial or on its behalf to Blackhawk pursuant to this Agreement
shall have been true and correct in all material respects as of this
date and shall be true and correct in all material respects at the
Closing as though made on and as of the Closing Date, in each case to
the reasonable satisfaction of Blackhawk, and First Financial shall
have performed all agreements herein required to be performed by it on
or prior to the Closing.
(b) CLOSING CERTIFICATE. Blackhawk shall have received a
certificate signed by the chief executive officer of First Financial,
dated as of the Closing Date, certifying in such detail as Blackhawk
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may reasonably request, as to the fulfillment of the conditions to the
obligations of Blackhawk as set forth in this Agreement.
(c) REGULATORY AND OTHER APPROVALS. Blackhawk shall have
obtained the approval of all appropriate federal and state regulatory
agencies (including, without limitation, the approval of the Federal
Reserve) necessary to complete the transactions contemplated by this
Agreement, all required waiting periods shall have expired, and there
shall have been no motion for rehearing or appeal from any such
approval or commencement of any suit or action by any governmental
authority seeking to enjoin the transactions provided for herein or to
obtain other relief with respect thereto.
(d) APPROVAL OF MERGER AND EXECUTION OF CERTIFICATE OF
MERGER. This Agreement and the transactions contemplated hereby shall
have been approved by the Board of Directors and the stockholders of
First Financial in accordance with applicable law and the Certificate
of Incorporation and bylaws of First Financial. The proper officers
of First Financial shall have executed and delivered to Blackhawk the
Certificate of Merger, in form suitable for filing with the Delaware
Secretary of State, and shall have executed and delivered all such
other certificates, statements or other instruments as may be
necessary or appropriate to effect such filings.
(e) NO LITIGATION WITH RESPECT TO TRANSACTIONS. No suit or
other action shall have been instituted or threatened seeking to
enjoin the consummation of the transactions contemplated hereby or to
obtain other relief in connection with this Agreement or the
transactions contemplated hereby, including, but not limited to,
substantial damages that reasonably could be expected to result in the
issuance of an order enjoining such transactions or result in a
determination that First Financial has failed to comply with
applicable legal requirements of a material nature in connection with
the transactions contemplated hereby or actions preparatory thereto.
(f) OPINION OF COUNSEL. Blackhawk shall have received the
opinion of Schiff Hardin & Waite, special counsel for First Financial,
dated as of the Closing Date, and in form and substance satisfactory
to Blackhawk and its counsel to the following effect.
(i) First Financial is a corporation validly existing
and in good standing under the laws of the State of Delaware. First
Financial is a savings and loan holding company registered under HOLA.
(ii) The Bank was chartered under the laws of the
United States to transact the business of a federal savings
association, and the charter of the Bank is in full force and effect.
(iii) The authorized capital stock of First
Financial is (i) 1,500,000 shares of common stock, $.10 par value per
share, and (ii) 250,000 shares of preferred stock, $.01 par value per
share.
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(iv) The execution, delivery, and performance of this
Agreement, and the transactions contemplated herein have been duly
authorized by the Board of Directors and the stockholders of First
Financial, these being the only authorizations required under its
Certificate of Incorporation, its bylaws, and the DGCL. This
Agreement constitutes the legal, valid and binding obligation of First
Financial enforceable in accordance with their respective terms,
subject to applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors generally and to
general principles of equity.
(v) The execution, delivery and performance of this
Agreement does not violate any provisions of the Certificate of
Incorporation or bylaws of First Financial.
(vi) To the best knowledge of counsel, there are no material
claims, actions, suits, or proceedings pending or threatened against
First Financial, which depart from the ordinary, routine litigation
incident to the kind of business carried on by First Financial that
might reasonably be expected to have a Material Adverse Effect on
First Financial.
(vii) To the best knowledge of counsel, there are
no actions, suits or proceedings pending or threatened against First
Financial to enjoin consummation of the Merger or to obtain other
relief (other than payment to dissenting stockholders) in connection
with this Agreement or the transactions contemplated hereby.
In rendering the foregoing opinion, such counsel may rely on
certificates of corporate officers or governmental officials as to
factual matters.
(g) NO ADVERSE CHANGES. Between December 31, 1997 and the
Closing Date, the business of First Financial shall have been
conducted in the ordinary course consistent in all material respects
with prudent banking practices, and there shall not have occurred any
material adverse change or any condition, event, circumstance, fact or
occurrence (other than enactment of H.R. 10, the financial
modernization legislation, or the like) that may reasonably be
expected to result in a material adverse change in First Financial's
or the Bank's business, income, assets, liabilities or financial
condition.
(h) OTHER DOCUMENTS. Blackhawk shall receive at the
Closing all such other documents, certificates or instruments as it
may have reasonably requested evidencing compliance by First Financial
with the terms of this Agreement.
(i) UPDATED STATEMENTS. First Financial shall have
provided Blackhawk any information necessary to make the Statements of
Essential Facts of First Financial set forth in Article II true and
correct as of the Closing Date (the "First Financial Updated
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Statements"), and none of such First Financial Updated Statements
shall reflect a material adverse change from the Statements of
Essential Facts of First Financial made as of the date of this
Agreement.
5.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF FIRST FINANCIAL.
Unless the conditions are waived by First Financial, all obligations
of First Financial under this Agreement are subject to the
fulfillment, prior to or at Closing, of each of the following
conditions:
(a) STATEMENTS OF ESSENTIAL FACTS; PERFORMANCE OF
AGREEMENTS. The Statements of Essential Facts of Blackhawk and
Acquisition Corp. contained in Article III of this Agreement, as
amended or supplemented by the Blackhawk and Acquisition Corp. Updated
Statements (as defined in SECTION 5.2(j)) and the representations and
warranties of Blackhawk and Acquisition Corp. contained in any
documents, certificates, schedules or exhibits delivered by Blackhawk
and Acquisition Corp. or on their behalf to First Financial pursuant
to this Agreement shall have been true and correct in all material
respects as of this date and shall be true and correct in all material
respects at the Closing as though made on and as of the Closing Date,
in each case to the reasonable satisfaction of First Financial, and
Blackhawk and Acquisition Corp. shall have performed all agreements
herein required to be performed by them on or prior to the Closing.
(b) CLOSING CERTIFICATE. First Financial shall have
received a certificate signed by the chief executive officers of
Blackhawk and Acquisition Corp. and dated as of the Closing Date,
certifying in such detail as First Financial may reasonably request,
as to the fulfillment of the conditions to the obligations of First
Financial as set forth in this Agreement.
(c) REGULATORY AND OTHER APPROVALS. Blackhawk shall have
obtained the approval of all appropriate federal and state banking
regulatory agencies (including, without limitation, the approval of
the Federal Reserve Board) necessary to complete the transactions
contemplated by this Agreement, all required waiting periods shall
have expired, and there shall have been no motion for rehearing or
appeal from such approval or commencement of any suit or action by any
governmental authority seeking to enjoin the transactions provided for
herein or to obtain other relief with respect thereto.
(d) FAIRNESS OPINION. Howe Barnes Investments, Inc. shall
have delivered to the Board of Directors of First Financial, as of the
date of this Agreement, its opinion to the effect that the
consideration to be received in the Merger is fair, from a financial
point of view, to the stockholders of First Financial, such opinion
shall have been updated as of the date of the Proxy Statement used to
solicit stockholder approval of the Agreement, and such opinion shall
not have been withdrawn, amended or modified in any material respect
at or prior to the Closing.
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(e) NO LITIGATION. No suit or other action shall have been
instituted or threatened seeking to enjoin the consummation of the
transactions contemplated hereby or to obtain other relief in
connection with this Agreement or the transactions contemplated hereby
(including, but not limited to, substantial damages) that reasonably
could be expected to result in the issuance of an order enjoining such
transactions or result in a determination that Blackhawk has failed to
comply with applicable legal requirements of a material nature in
connection with the transactions contemplated hereby or actions
preparatory thereto.
(f) OPINION OF COUNSEL. First Financial shall have
received the opinion of Werner & Blank, counsel for Blackhawk and
Acquisition Corp., dated as of the Closing Date, in form satisfactory
to First Financial and its counsel to the following effect.
(i) Blackhawk is a corporation validly existing and in
good standing under the laws of the State of Wisconsin. Acquisition
Corp. is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Blackhawk is
registered as a bank holding company under the Bank Holding Company
Act of 1956.
(ii) The execution, delivery, and performance of this
Agreement and the transactions contemplated hereby have been duly
authorized by the Board of Directors of Blackhawk and Acquisition
Corp. and by Blackhawk as the sole stockholder of Acquisition Corp.,
these being the only authorizations required under the Articles of
Incorporation and bylaws of Blackhawk, the Certificate of
Incorporation and bylaws of Acquisition Corp. and the statutes of the
State of Wisconsin and the DGCL. This Agreement constitute the legal,
valid and binding obligations of Blackhawk and Acquisition Corp.
enforceable in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors generally and to general principles
of equity.
(iii) The execution, delivery and performance of
this Agreement does not violate any provision of the Articles of
Incorporation or bylaws of Blackhawk or any provision of the
Certificate of Incorporation or bylaws of Acquisition Corp.
(iv) To the best knowledge of counsel, there are no
actions, suits or proceedings pending or threatened against Blackhawk
or Acquisition Corp. to enjoin consummation of the Merger or to obtain
other relief in connection with this Agreement or the transaction
contemplated hereby.
In rendering the foregoing opinion, such counsel may rely on
certificates of corporate officers or governmental officials as to
factual matters.
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(g) APPROVAL OF MERGER AND DELIVERY OF THE CERTIFICATE OF
MERGER. This Agreement and the transactions contemplated hereby shall
have been approved by the Board of Directors of Blackhawk and
Acquisition Corp. and by Blackhawk as the sole stockholder of
Acquisition Corp. in accordance with governing statutes and the
Articles of Incorporation and bylaws of Blackhawk and the Certificate
of Incorporation and bylaws of Acquisition Corp. The proper officers
of each of Blackhawk, Acquisition Corp. and First Financial, as
applicable, shall have executed the Certificate of Merger in form
suitable for filing with the Delaware Secretary of State and shall
have executed and delivered all such other certificates, statements or
other instruments as may be necessary or appropriate to effect such
filings.
(h) MERGER CONSIDERATION. Blackhawk shall have deposited
funds with the exchange agent or made other arrangements to provide
funds to the exchange agent, sufficient to enable the exchange agent
to pay in full the total amount of funds required to be paid at the
Effective Time pursuant to SECTION 1.1 hereof for exchanges in
accordance with this Agreement.
(i) OTHER DOCUMENTS. First Financial shall receive at the
Closing all such other documents, certificates or instruments as it
may have reasonably requested evidencing compliance by Blackhawk and
Acquisition Corp. with the terms of this Agreement.
(j) UPDATED STATEMENTS. Blackhawk and Acquisition Corp.
shall have provided First Financial any information necessary to make
the Statements of Essential Facts of Blackhawk and Acquisition Corp.
set forth in Article III true and correct as of the Closing Date (the
"Blackhawk and Acquisition Corp. Updated Statements"), and none of
such Blackhawk and Acquisition Corp. Updated Statements shall reflect
a material adverse change from the Statements of Essential Facts of
Blackhawk and Acquisition Corp. made as of the date of this Agreement.
ARTICLE VI
GENERAL PROVISIONS
6.1 NON-SURVIVAL OF STATEMENTS OF ESSENTIAL FACTS AND COVENANTS.
None of the Statements of Essential Facts and covenants in this
Agreement shall survive the Effective Time, except that the covenants
in this Agreement with respect to confidentiality contained in SECTION
4.12, further assurances contained in SECTION 6.2, payment of expenses
contained in SECTION 6.3 and this SECTION 6.1 shall survive the
termination of this Agreement pursuant to SECTION 6.5 hereof and
except for such other covenants and agreements contained in this
Agreement that by their terms apply in whole or in part after the
Effective Time.
6.2 FURTHER ASSURANCES. Each of the parties hereto agrees that
at any time and from time to time after the Effective Time it shall
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cause to be executed and delivered to any party such further
instruments or documents as such other party may reasonably require to
give effect to the transactions contemplated hereby.
6.3 EXPENSES. Each of the parties to this Agreement shall bear
their respective costs and expenses incurred in connection with this
Agreement and the transactions contemplated hereby; provided, however,
that:
(a) in the event this Agreement is terminated by Blackhawk
pursuant to SECTION 6.5(d), (e) or (g) hereof or by First Financial
pursuant to SECTION 6.5(f) hereof, First Financial shall reimburse
Blackhawk in an amount not to exceed $100,000 for the out-of-pocket
expenses (except that with respect to termination pursuant to 6.5(g),
out-of-pocket expenses shall not exceed $50,000, rather than
$100,000), subject to verification thereof, it has incurred in
furtherance of this Agreement and the transactions contemplated
herein, including, but not limited to, reasonable fees of
professionals engaged for such purpose by or on behalf of Blackhawk;
provided, however, that if this Agreement is terminated by First
Financial pursuant to SECTION 6.5(f), such Transaction Proposal (as
defined in SECTION 4.10(c) hereof) is not consummated and Blackhawk
subsequently enters into an acquisition agreement with First
Financial, then Blackhawk shall refund to First Financial any and all
expenses First Financial shall have paid to Blackhawk pursuant to this
SECTION 6.3(a). All costs and expenses reasonably estimated to be
incurred by First Financial shall be either paid or accrued for on or
prior to the Closing Date; provided, however, that nothing contained
herein shall be deemed to relieve First Financial of its liability to
pay any expenses incurred post-closing in connection with this
Agreement;
(b) in the event this Agreement is terminated by First
Financial pursuant to SECTION 6.5(d) or (e), Blackhawk shall reimburse
First Financial in an amount not to exceed $100,000 for the out-of-
pocket expenses, subject to verification thereof, it has incurred in
furtherance of this Agreement and the transactions contemplated
herein, including, but not limited to, reasonable fees of
professionals engaged for such purpose by or on behalf of First
Financial;
(c) in the event this Agreement is terminated by a party as
a result of a willful breach by the other party, the non-breaching
party may pursue any remedies available to it at law or in equity and
shall, in addition to its out-of-pocket expenses (which shall be paid
as specified in (a) and (b) of this SECTION 6.3 and shall not be
limited to $100,000), be entitled to recover such additional amounts
as such non-breaching party may be entitled to receive at law or in
equity; and
(d) in the event this Agreement is terminated either (i) by
First Financial pursuant to SECTION 6.5(f), or (ii) by Blackhawk as
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provided in SECTION 6.5(e) as a result of First Financial's breach of
SECTION 4.4 or by Blackhawk as provided in SECTION 6.5(e) following a
failure of First Financial's stockholders to grant the necessary
approval in SECTION 5.1(d) and contemporaneously with the termination
provided in this paragraph (ii) there is a Transaction Proposal and
prior to, or within 12 months of such termination, First Financial
shall have entered into a definitive agreement relating to such
Transaction Proposal, then, with respect to a termination under either
paragraph (i) or (ii) of this SECTION 6.3(d) First Financial shall pay
to Blackhawk, in immediately available funds, an amount equal to
$500,000 within ten (10) business days after demand for payment by
Blackhawk following such termination, which amount, however, shall be
reduced by any out-of-pocket expenses First Financial shall have
previously paid or shall be obligated to pay to Blackhawk pursuant to
SECTION 6.3(a) hereof.
6.4 SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the respective heirs, successors,
assigns of the parties hereto; provided, however, that no party may
assign this Agreement without the written consent of the other
parties, and except that Blackhawk may assign this Agreement to any
entity, a majority of the stock of which is owned directly or
indirectly by Blackhawk. Any assignment shall only be done upon prior
notice to First Financial and will not relieve Blackhawk from any of
its responsibilities, duties, liabilities and obligations set forth
herein.
6.5 TERMINATION. This Agreement may be terminated (a) at any
time, whether before or after stockholder action, by agreement of
Blackhawk and First Financial, (b) by either Blackhawk or First
Financial if the regulatory approvals referred to in SECTION 5.1(c)
hereof have not been obtained on or before September 30, 1998, (c) by
either Blackhawk or First Financial, either before or after approval
of this Agreement by the stockholders of First Financial, if the
Closing has not occurred by October 31, 1998, (d) by either Blackhawk
or First Financial, either before or after approval of this Agreement
by the stockholders of First Financial, if any of the conditions
precedent to the obligations of such terminating party contained in
Article V hereof shall not have been satisfied or waived prior to the
Effective Time, (e) by either Blackhawk or First Financial, either
before or after approval of this Agreement by the stockholders of
First Financial, if a material default shall be made by the other
party in the observance or in the due and timely performance of any of
its covenants and agreements contained in this Agreement and such
default shall not have been fully cured within a reasonable time, but
in no event more than twenty (20) days, after written notice
specifying the alleged default shall have been given, (f) by First
Financial if its Board of Directors shall determine that a Transaction
Proposal constitutes a Superior Proposal and the Board shall have
received a written opinion of its outside counsel that the failure to
accept such Superior Proposal could reasonably be expected to result
in a breach of the fiduciary duties of the Board under applicable law,
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(g) by Blackhawk if First Financial fails to take the Remedial Actions
set forth in SECTION 4.23(b), or (h) by Blackhawk, in the event the
Closing Equity (as defined in SECTION 1.1(f)) is less than $7,136,130
and Blackhawk determines not to consummate the Merger by paying the
minimum Merger Price of $29.00.
6.6 NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given (a) when delivered
personally; (b) the second business day after being deposited in the
United States mail registered or certified (return receipt requested);
(c) the first business day after being deposited with Federal Express
or any other recognized national overnight courier service; or (d) on
the business day on which it is sent and received by facsimile, in
each case to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) If to Blackhawk addressed to:
Dennis M. Conerton
President and Chief Executive Officer
Blackhawk Bancorp, Inc.
400 Broad Street
Beloit, Wisconsin 53511
Phone: (608) 364-8911
Fax: (608) 364-8946
with a copy to:
Thomas C. Blank, Esq.
Werner & Blank Co. L.P.A.
7205 West Central Avenue
Toledo, Ohio 43617
Phone: (419) 841-8051
Fax: (419) 841-8380
(b) If to First Financial, addressed to:
Steven C. Derr
President and Chief Executive Officer
First Financial Bancorp, Inc.
121 E. Locust Street
Belvidere, Illinois 61008
Phone: (815) 544-3167
Fax: (815) 544-0802
with a copy to:
Christopher J. Zinski, Esq.
Schiff Hardin & Waite
7300 Sears Tower
Chicago, Illinois 60606
Phone: (312) 258-5548
Fax: (312) 258-5600
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6.7 GOVERNING LAW. This Agreement shall be governed by, and
construed and enforced in accordance with, the internal laws of the
State of Delaware, without giving effect to the conflict of laws
principles thereof.
6.8 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, and each such executed counterpart will be an
original instrument.
6.9 HEADINGS. Descriptive headings appearing in this Agreement
are for convenience only and will not be deemed to explain, limit or
amplify any of the provisions hereof.
6.10 ENTIRE AGREEMENT; AMENDMENT. This Agreement, with its
exhibits and the schedules delivered pursuant to it, sets forth the
entire understanding of the parties and supersedes all prior
agreements, arrangements and communications, whether oral or written.
This Agreement may only be modified or amended by an agreement in
writing signed by Blackhawk and First Financial.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year hereinabove first written.
BLACKHAWK BANCORP, INC.
By: /s/ DENNIS M. CONERTON
Title: PRESIDENT AND CEO
BLACKHAWK ACQUISITION CORP.
By: /s/ DENNIS M. CONERTON
Title: PRESIDENT AND CEO
FIRST FINANCIAL BANCORP, INC.
By: /s/ STEVEN C. DERR
Title: PRESIDENT
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APPENDIX B
Howe Barnes Investments, Inc.
Member of the New York Stock Exchange
135 South LaSalle St.
Chicago, Illinois 60603
(312) 655-3000
July 23, 1998
Board of Directors
First Financial Bancorp, Inc.
121 East Locust Street
Belvidere, Illinois 61204
Members of the Board:
You have requested our opinion as investment bankers as to the
fairness, from a financial point of view, to the holders of the
outstanding shares of common stock of First Financial Bancorp, Inc.
("FFBI") of the consideration to be paid in the merger (the "Merger")
of FFBI with Blackhawk Bancorp, Inc. ("Blackhawk"), pursuant to the
Agreement of Merger (the "Merger Agreement"), dated May 7, 1998,
between Blackhawk, Blackhawk Acquisition Corp. ("Acquisition Corp."),
and FFBI.
Pursuant to the Merger Agreement, Acquisition Corp. will merge into
FFBI and Acquisition Corp. as a separate corporate entity will cease.
Each share of FFBI common stock issued and outstanding immediately
prior to the effective time of the Merger (other than shares as to
which statutory dissenters, appraisal rights have been exercised and
certain other shares specified in Section 1.1(f) of the Merger
Agreement) will be converted into the right to receive $30.00 in cash,
provided that the closing equity of FFBI, as defined in the Merger
Agreement, equals or exceeds $7,560,000; provided, however that in no
event shall the shares of FFBI common stock be converted into less
than $29.00 per share ("the Consideration"). The terms of the Merger
are more fully set forth in the Merger Agreement.
For purposes of this opinion and in connection with our review of the
proposed transaction, we have, among other things:
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APPENDIX B
1. Participated in discussions with representatives of FFBI
concerning its financial condition, businesses, assets,
earnings, prospects, and such senior management's views as
to the future financial performance of FFBI;
2. Reviewed the terms of the Merger Agreement;
3. Reviewed certain publicly available financial statements,
both audited (where available) and unaudited, and related
financial information of FFBI, including those included in
their respective Annual Reports on Form 10-KSB for the past
three years ended December 31, 1997, and the respective
Quarterly Reports on Form 10-QSB for the periods ended
September 30, 1997, June 30, 1997 and March 31, 1997 as well
as other internally generated reports relating to
asset/liability management, asset quality, and the like;
4. Reviewed certain financial forecasts and projections of FFBI
prepared by its management and discussed and reviewed
certain aspects of the past and current business operations,
financial condition, and future prospects of FFBI with
certain members of management;
5. Reviewed certain aspects of the financial performance of
FFBI and compared such financial performance of FFBI,
together with stock market data relating to FFBI common
stock, with similar data available for certain other
financial institutions and certain of their publicly traded
securities; and
6. Reviewed certain of the financial terms, to the extent
publicly available, of certain recent business combinations
involving other financial institutions.
We have assumed and relied, without independent verification, upon the
accuracy and completeness of all of the financial and other
information that has been provided to us by FFBI, Blackhawk, their
respective representatives, and of the publicly available information
that was reviewed by us. We are not experts in the evaluation of
allowances for loan losses and have not independently verified such
allowances, and have relied on and assumed that the aggregate
allowances for loan losses set forth in the balance sheets of each of
FFBI and Blackhawk at December 31, 1997 are adequate to cover such
losses and complied fully with applicable law, regulatory policy and
sound banking practice as of the date of such financial statements.
We were not retained to and we did not conduct a physical inspection
of any of the properties or facilities of FFBI or Blackhawk, did not
make any independent evaluation or appraisal of the assets,
liabilities or prospects of FFBI or Blackhawk, were not furnished with
any such evaluation or appraisal, and did not review any individual
B-2
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APPENDIX B
credit files. Our opinion is necessarily based on economic, market,
and other conditions as in effect on, and the information made
available to us as of, the date hereof.
Howe Barnes Investments, Inc. ("HBI"), as part of its investment
banking business, is regularly engaged in the valuation of banks and
bank holding companies, thrifts and thrift holding companies, and
various other financial services companies, in connection with mergers
and acquisitions, initial and secondary offerings of securities, and
valuations for other purposes. In the ordinary course of our business
HBI acts as a market maker, buying and selling the common stock of
FFBI for our own account and for the accounts of our customers. In
rendering this fairness opinion we have acted on behalf of the Board
of Directors of FFBI and will receive a fee for our services.
Our opinion as expressed herein is limited to the fairness, from a
financial point of view, of the Consideration and does not address
FFBI's underlying business decision to proceed with the Merger. We
have been retained on behalf of the Board of Directors of FFBI, and
our opinion does not constitute a recommendation to any holder of FFBI
common stock as to how such holder should vote with respect to the
Merger or the Merger Agreement at any meeting of holders of FFBI
common stock.
Subject to the foregoing and based on our experience as investment
bankers, our activities as described above, and other factors we have
deemed relevant, we are of the opinion as of the date hereof that the
Consideration is fair, from a financial point of view, to the holders
of FFBI common stock.
Sincerely,
Howe Barnes Investments, Inc.
/s/ DANIEL E. COUGLIN
Daniel E. Coughlin, Senior Vice President
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<PAGE>
APPENDIX C
SECTION 262 OF THE DELAWARE CODE
Section 262. Appraisal Rights.
(a) Any stockholder of a corporation of this State who
holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who
continuously holds such shares through the effective date of the
merger or consolidation, who has otherwise complied with subsection
(d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Section
228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As
used in this section, the word "stockholder" means a holder of record
of stock in a stock corporation and also a member of record of a
nonstock corporation; the words "stock" and "share" mean and include
what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued
by a depository representing an interest in one or more shares, or
fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of
any class or series of stock of a constituent corporation in a merger
or consolidation to be effected pursuant to Section 251, Section 252,
Section 254, Section 257, Section 258, Section 263 or Section 264 of
this title:
(1) Provided, however, that no appraisal rights under
this section shall be available for the shares of any class or
series of stock, which stock, or depository receipts in respect
thereof, at the record date fixed to determine the stockholders
entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of
Securities Dealers, Inc. or (ii) held of record by more than
2,000 holders; and further provided that no appraisal rights
shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for
its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this
title.
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APPENDIX C
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the
shares of any class or series of stock of a constituent
corporation if the holders thereof are required by the terms of
an agreement of merger or consolidation pursuant to Section 251,
252, 254, 257, 258, 263 and 264 of this title to accept for such
stock anything except:
a. Shares of stock of the corporation surviving
or resulting from such merger or consolidation, or
depository receipts in respect thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of
stock or depository receipts, at the effective date of
the merger or consolidation will be either listed on a
national securities exchange or designated as a
national market system security on an interdealer
quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or
fractional depository receipts described in the
foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock,
depository receipts and cash in lieu of fractional
shares or fractional depository receipts described in
the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary
Delaware corporation party to a merger effected under
Section 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal
rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of
incorporation that appraisal rights under this section shall be
available for the shares of any class or series of its stock as a
result of an amendment to its certificate of incorporation, any merger
or consolidation in which the corporation is a constituent corporation
or the sale of all or substantially all of the assets of the
corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth
in subsections (d) and (e) of this section, shall apply as nearly as
is practicable.
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APPENDIX C
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which
appraisal rights are provided under this section is to be
submitted for approval at a meeting of stockholders, the
corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsections
(b) or (c) hereof that appraisal rights are available for
any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section.
Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking
of the vote on the merger or consolidation, a written demand
for appraisal of his shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against
the merger or consolidation shall not constitute such a
demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within
10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall
notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor
of or consented to the merger or consolidation of the date
that the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved
pursuant to Section 228 or 253 of this title, the surviving
or resulting corporation, either before the effective date
of the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation
and that appraisal rights are available for any or all of
the shares of the constituent corporation, and shall include
in such notice a copy of this section. The notice shall be
sent by certified or registered mail, return receipt
requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder
entitled to appraisal rights may, within 20 days after the
date of mailing of the notice, demand in writing from the
surviving or resulting corporation the appraisal of his
shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the
appraisal of his shares.
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APPENDIX C
(e) Within 120 days after the effective date of the merger
or consolidation, the surviving or resulting corporation or any
stockholder who has complied with subsections (a) and (d) hereof and
who is otherwise entitled to appraisal rights, may file a petition in
the Court of Chancery demanding a determination of the value of the
stock of all such stockholders. Notwithstanding the foregoing, at any
time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his
demand for appraisal and to accept the terms offered upon the merger
or consolidation. Within 120 days after the effective date of the
merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request,
shall be entitled to receive from the corporation surviving the merger
or resulting from the consolidation a statement setting forth the
aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have
been received and the aggregate number of holders of such shares. Such
written statement shall be mailed to the stockholder within 10 days
after his written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration
of the period for delivery of demands for appraisal under subsection
(d) hereof, whichever is later.
(t) Upon the filing of any such petition by a stockholder,
service of a copy thereof shall be made upon the surviving or
resulting corporation, which shall within 20 days after such service
file in the office of the Register in Chancery in which the petition
was filed a duly verified list containing the names and addresses of
all stockholders who have demanded payment for their shares and with
whom agreements as to the value of their shares have not been reached
by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if
so ordered by the Court, shall give notice of the time and place fixed
for the hearing of such petition by registered or certified mail to
the surviving or resulting corporation and to the stockholders shown
on the list at the addresses therein stated. Such notice shall also be
given by 1 or more publications at least 1 week before the day of the
hearing, in a newspaper of general circulation published in the City
of Wilmington, Delaware or such publication as the Court deems
advisable. The forms of the notices by mail and by publication shall
be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall
determine the stockholders who have complied with this section and who
have become entitled to appraisal rights. The Court may require the
stockholders who have demanded an appraisal for their shares and who
hold stock represented by certificates to submit their certificates of
stock to the Register in Chancery for notation thereon of the pendency
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APPENDIX C
of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an
appraisal, the Court shall appraise the shares, determining their fair
value exclusive of any element of value arising from the
accomplishment or expectation of the merger or consolidation, together
with a fair rate of interest, if any, to be paid upon the amount
determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the
fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency
of the proceedings. Upon application by the surviving or resulting
corporation or by any stockholder entitled to participate in the
appraisal proceeding, the Court may, in its discretion, permit
discovery or other pretrial proceedings and may proceed to trial upon
the appraisal prior to the final determination of the stockholder
entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates
of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined
that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of
the shares, together with interest, if any, by the surviving or
resulting corporation to the stockholders entitled thereto. Interest
may be simple or compound, as the Court may direct. Payment shall be
so made to each such stockholder, in the case of holders of
uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be
enforced as other decrees in the Court of Chancery may be enforced,
whether such surviving or resulting corporation be a corporation of
this State or of any state.
(j) The costs of the proceeding may be determined by the
Court and taxed upon the parties as the Court deems equitable in the
circumstances. Upon application of a stockholder, the Court may order
all or a portion of the expenses incurred by any stockholder in
connection with the appraisal proceeding, including, without
limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all of the shares
entitled to an appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his appraisal rights as
provided in subsection (d) of this section shall be entitled to vote
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APPENDIX C
such stock for any purpose or to receive payment of dividends or other
distributions on the stock (except dividends or other distributions
payable to stockholders of record at a date which is prior to the
effective date of the merger or consolidation); provided, however,
that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written
withdrawal of his demand for an appraisal and an acceptance of the
merger or consolidation, either within 60 days after the effective
date of the merger or consolidation as provided in subsection (e) of
this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall
cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such
terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to
which the shares of such objecting stockholders would have been
converted had they assented to the merger or consolidation shall have
the status of authorized and unissued shares of the surviving or
resulting corporation.
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<TABLE>
<CAPTION>
/ X / PLEASE MARK VOTES REVOCABLE PROXY
AS IN THIS EXAMPLE FIRST FINANCIAL BANCORP, INC.
SPECIAL MEETING OF SHAREHOLDERS
August 20, 1998
<S> <C> <C>
For Against Abstain
The undersigned hereby appoints the 1. Proposal to approve and adopt the /__/ /__/ /__/
official proxy committee of the Board of Merger Agreement among the Company,
Directors, with full powers of substitution, Blackhawk Bancorp, Inc. and Blackhawk Acquisition Corp.,
to act as attorneys and proxies for the as more fully described in the accompanying Proxy
undersigned to vote all shares of Common Stock Statement.
of First Financial Bancorp, Inc. (the
"Company") which the undersigned is entitled For Against Abstain
to vote at the Special Meeting of Shareholders 2. Proposal to adjourn the Special /__/ /__/ /__/
("Meeting") to be held in the Meeting Room of Meeting in the event that the
the Ida Public Library, 320 North State Company's management should
Street, Belvidere, Illinois at 2:00 p.m. determine that such adjournment is in the best interest of
(local time) on Thursday, August 20, 1998. the Company and its stockholders, as more fully described
The official proxy committee is authorized to in the accompanying Proxy Statement, which would include
cast all votes to which the undersigned is adjourning the Special Meeting to enable management to
entitled as follows: solicit additional proxies which may be necessary to
ensure approval of the Merger Agreement.
The Board of Directors recommends a vote "FOR" each of the
listed proposals.
PLEASE CHECK BOX IF YOU PLAN TO ----------> /__/
ATTEND THE SPECIAL MEETING
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS
Please be sure to sign and date ____________ ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR EACH OF THE
this Proxy in the box below. Date PROPOSITIONS STATED ABOVE, IF ANY OTHER BUSINESS IS PRESENTED AT
____________________________________________ SUCH MEETING, THIS PROXY WILL BE VOTED BY THE HEREON NAMED PROXIES
AT THE DISCRETION OF A MAJORITY OF THE BOARD OF DIRECTORS. AT THE
PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO
Shareholder sign above -- Co-holder (if any) BE PRESENTED AT THE MEETING.
___________________________sign above________
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS.
/\ Detach above card, sign, date and mail in postage paid envelope provided. /\
</TABLE>
FIRST FINANCIAL BANCORP, INC.
Should the above-signed be present and elect to vote at the
Meeting or at any adjournment thereof and after notification to the
Secretary of the Company at the Meeting of the shareholder's
decision to terminate this proxy, then the power of said attorneys
and proxies shall be deemed terminated and of no further force and
effect. This proxy may also be revoked by sending written notice to
the Secretary of the Company at the address set forth on the Notice
of Special Meeting of Shareholders, or by the filing of a later
proxy prior to a vote being taken on a particular proposal at the
Meeting.
The above-signed acknowledges receipt from the Company prior to
the execution of this proxy of a notice of the Meeting, a proxy
statement dated July 23, 1998, and audited financial statements.
Please sign exactly as your name appears on this proxy card.
When signing as attorney, executor, administrator, trustee or
guardian, please give your full title. If shares are held jointly,
each holder should sign.
PLEASE ACT PROMPTLY -- SIGN, DATE & MAIL YOUR PROXY CARD TODAY
